Mergers and acquisitions what you need to know

from Osteo Life Spring issue 2022

Osteopathy Australia news

Have you been approached to sell your business? If so, as an osteopathic business owner, you may be unsure how to react, what to do next, and what to prepare for should things proceed down the acquisition path. This article guides you through the process and highlights the things you need to think about before deciding what’s right for you and your business.

WHEELING AND DEALING IN ALLIED HEALTH Healthcare mergers and acquisitions surged in 2021, growing 56% in the 12 months compared with 2020. There was particularly high growth among GP medical groups, which saw more than 400 deals, as well as managed care and rehabilitation subsectors, according to a new report from PwC. This compares with about 200 to 250 deals per year between 2017 and 2019. The growth in allied health land is rapid. Looking ahead to the rest of 2022 and beyond, the established pattern of deals surging after an economic downturn is likely to continue, with companies actively exploring potential acquisitions in the allied health industry.

STAGES OF ACQUISITION

Build your trusted, expert advisory group This is essential and the most important piece of advice you can take from this article. Experts (lawyer, accountant and a friend/family member/mentor with experience in the mergers and acquisitions field) can be a sounding board for your decisions and a trusted resource during the rest of the acquisition process. If selected carefully, they will not only help you negotiate the best price tag but also make sure you don’t get taken advantage of by an experienced acquirer.

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Your current accountant/lawyer may not be the right person to help with mergers and acquisitions – seek experts in the field.

Signing a non-disclosure agreement A non-disclosure agreement (NDA) is an agreement that certain information shared between parties will remain confidential. An NDA binds an individual who has signed it and prevents them from discussing information with any non-authorised party. Both the potential buyer and seller should sign this agreement. At this point in time, the potential acquirer will often ask for three to five years of basic financial reports.

“The right price for acquisition is one that recognises what you’ve built, what the acquirer will be able to do with what you’ve built and is sufficient to cause you to close the chapter on seeking your continued growth on your own”

BRETT WIENER Brett graduated from Victoria University and completed his Masters in Applied Positive Psychology at the University of Melbourne. He has a wealth of knowledge in the science of what it means for individuals, groups and institutions to thrive. He is a director at the Sports and Spinal Group in Bayside, Melbourne. Brett is a member of the Osteopathy Australia Board.

Back-of-the-envelope market valuation To inform owners of the estimated transaction value of their business, many companies will provide a detailed, backof-the-envelope (BOTE) market valuation. The BOTE approach establishes the estimated transaction value of a company by comparing its financial performance with similar companies that have previously been acquired. There is no unifying theory on a magic formula to determine the ‘right price’. The right price for acquisition is one that recognises what you’ve built, what the acquirer will be able to do with what you’ve built and is sufficient to cause you to close the chapter on seeking your continued growth on your own. Remember – the dollar amount isn’t all that matters – the devil is in the detail so it is important to consider the terms associated with what is being offered.

Valuation of your business Earnings before interest, taxes, depreciation and amortisation (EBITDA) is a measure of profitability. This is

the ultimate measure of a company’s success in the eyes of a bank or investor. A business is much more than its profitability, but when it comes to purchase price, that price is primarily based on profitability. The adjusted EBITDA is an area where an experienced accountant can be particularly valuable in helping you as a seller. In preparation for the sale, you will want to identify all one-time expenses or those that the buyer would not incur to run the business successfully following the transaction. Business owners often run personal or extraneous expenses through their companies that may not be necessary. Another example is investments in more PPE brought on by the COVID-19 pandemic are not likely to be necessary in the years ahead (we hope!). These expenses are added back to EBITDA to create a more realistic adjusted EBITDA on which to base the purchase price.

Market multiples To determine valuation, most companies use a common industry standard of taking a multiple of the adjusted EBIDTA. The current, average market multiple in allied health is between 3 to 5.5 times, which means that if your adjusted EBITDA is $100,000, then we would expect offers to come in between $300,000 and $550,000. The key word here is ‘average’. Some multiples will go higher depending on the industry, size of company and demand. Recently, multiples exceeding 17 times have been seen for larger, established companies in durable medical equipment, staffing and applied behavioural analysis services while some very small providers have received offers as low as two times.

“A business is much more than its profitability, but when it comes to purchase price, that price is primarily based on profitability”

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As there is such a substantial range of market multiples, it shows the importance of having a knowledgeable adviser who can help determine a strong adjusted EBITDA and who understands the industry and its multiples. This will lead to a fair and reasonable valuation of your business.

Letter of intent or non-binding indicative offer A letter of intent (LOI) or non-binding indicative offer (NBIO) is essentially a mergers and acquisition form of a marriage proposal from the buyer. As the name implies, the LOI lays out the intent of both parties – that is, the seller states they are willing to sell for the proposed terms, and the buyer states what they are willing to pay.

The LOI is an important step because it lays out the basics of the final deal: the purchase price and terms, anticipated closing date, length of exclusivity (which prevents you from talking to other potential buyers – often called the ‘no shop clause’) and more. Based on what each side discovers during ‘due diligence’ (see below) and/or whether the profits of the company decline, the structure of the deal may change. The LOI is not legally binding, and either party can walk away from the deal at any time during this part of the process.

Structure of an offer Within your initial offer, the potential buyer will often take your adjusted EBITDA and attach a multiple to that number. That will provide you with a ‘total purchase price’. They will then break this number down into a percentage of cash as an upfront payment with the rest of the total purchase price held in an agreed type of share (speak to your lawyer and accountant about these different types).

Also, there will often be an ‘escrow’ period attached to the agreement. This is how long you will be handcuffed to the business with the terms of this escrow laid out in your contract. The dollar amount of shares left in the business are often attached to what is called a maintainable EBITDA (MEBITDA) – this means you must hold or improve the business’s performance based on the agreed MEBITDA to earn out the rest of the agreed purchase price at the end of your escrow period.

Within the contract, there will be clauses that speak to your options as to when and what you can do with these shares. There is also a formula you can use to work out what deductions will occur if the business’s performance declines. It is best to consider this percentage as ‘cream on top’, rather than a given you will receive.

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You have the right to negotiate the initial offer (and the initial offer is never their best offer). This means not just the overall purchase multiple and price, but the breakdown of cash versus equity. Consult your team of advisers on this.

Due diligence Once an LOI is signed, the due diligence process begins. This is when the buyer conducts a complete investigation of a prospective acquisition, including gathering more intimate details of the company such as full financials, employee/associate breakdowns, customers, contracts and any skeletons

in the closet like lawsuits and potential liabilities. Most of this information is provided by the seller via the uploading of supporting documentation as requested by the buyer into a secure data room.

TOP TIP Don’t forget that the due diligence process is also for you to learn more about the potential buyer – you have full right to request all the same documentation that you are being asked for. Ask for their financials, speak to their funders, staff or other companies who have been acquired by the company.

Contract of sale and employee agreements A final contract for an acquisition will either be in the form of a:

Share sale. Where all the shares in that company are acquired; or

Business sale. Where the assets of that business are acquired.

Buyers tend to prefer asset deals because it is easier to clarify what pieces of the company the buyer wants to assume, and they do not assume the potential liabilities from years past. If the buyer acquires the stock, the liability falls on the new owner. In some cases, an asset deal may help shield a buyer from the past misdeeds of the seller, but that’s not always the case.

In addition, don’t forget that you are about to become an employee (unless you are negotiating a full and immediate exit), and this requires a new employee contract. This is where understanding where this decision is taking you on your own, personal journey and what you want to do in your professional and personal life in the future is essential.

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This isn’t the time to get frustrated or impatient with the length of the process. Ensure that you are happy with every detail in each of the contracts – both financially and non-financially before signing.

YOU’VE SIGNED THE AGREEMENTS – NOW WHAT? Conditions precedent are all the items that are required to occur before the confirmation of sale and settlement date.

“Buyers tend to prefer asset deals because it is easier to clarify what pieces of the company the buyer wants to assume, and they do not assume the potential liabilities from years past”

A completion checklist is commonly used to detail all the steps required through each of the final stages to settle the transaction. The business sale and transfer of funds is only complete when each step of the checklist has been executed or excused by the buyer.

Four key non-financial questions to ask

You need to ask yourself four key non-financial questions. It is worth discussing these with your coach, mentor or trusted adviser. Take the time to digest, reflect and visualise what life might look like for you and your family in the future. 1. As a business owner with autonomy, are you ready to be an employee and all that comes with it? 2. Is the offer life-changing or life-helping? 3. If the acquiring company is funded by private equity, they have been proven across all industries to care about EBITDA above anything else, regardless of their philosophy and culture – are you OK to be at the mercy of this for your escrow period? 4. What does life look like for you after the escrow period?

* The information provided in this article is a personal perspective based on life lessons and not intended as formal financial advice. Always seek professional advice from qualified advisers.