Thinking of selling your company or practice? Here are the advantages and disadvantages of each option

Competitive buyer

A competitive buyer is one who typically competes or operates in the same or similar market to the seller. This buyer generally sees competitive advantages to an acquisition. They can be single or multi-location but are generally smaller than the strategic buyer or consolidator.

Advantages

• Strategic benefit: In these situations, the acquirer should see unique reasons for an acquisition, accretive to the deal in addition to the cash flow being acquired. For example, gaining greater control over a market, removing a competitor from the market, or, defending against a new competitor acquiring the business, are compelling acquisition reasons. This can sometimes result in superior valuation.
• Familiarity: The competitive buyer is generally aware of the seller’s business and this knowledge can expedite and make for a smoother transaction.

Disadvantages

• Confidentiality: Going down this path can expose a close competitor to sensitive information including pricing, staff compensation, and other proprietary knowledge. Staging the release of information and synthesizing sensitive information becomes critical, and operating under a good confidentiality agreement or NDA is important.
• Financing: Generally, a competitive buyer is more capable of securing financing relative to the internal buyout. This is true by virtue of owning an existing business and enjoying the benefits of those cash flows, and security. However, what may be unknown to the vendor is the competitive buyer’s financial strength. They generally do not have pockets as deep as the strategic buyer or consolidator. Vendor financing may still be required.
• Staff continuity: Staff may not be comfortable working for a direct competitor going forward, leading to possible staff continuity challenges.

Strategic buyer or consolidator

A strategic buyer (also a consolidator, roll-up, or corporate buyer) is generally characterized by a larger-scale company or competitor in the same industry. Their business model revolves around acquiring and consolidating businesses in a particular sector to expand their reach, diversify their services, and expand market share.

They typically have multiple locations under ownership, often span multiple provinces, and have a formalized acquisition process and team. Their ownership can be privately held or publicly traded, but generally includes an element of institutional financial backing from a private equity group.

Advantages

• Synergies: They can leverage existing resources, broader scale purchasing power, shared specialty resources, and client bases to create additional value.
• Certainty of close: A strategic buyer generally has strong certainty of close. They typically have cash reserves and credit facilities earmarked specifically for acquisitions and have formal acquisition processes with specialized acquisition teams.
• Deeper resources: A strategic buyer often has deep resources they can bring to the table to better the patient and customer experience.
• Equity participation: Every strategic buyer is different, and there are variations by industry. In some situations, future equity participation can be structured as part of the deal which is tied to future performance of the vendor’s company or the performance of the strategic buyer as a whole.
• Faster Growth: The merged entity can experience accelerated growth through economies of scale.
• Valuation certainty: Strategic buyers often value businesses on known valuation multiples and metrics, reducing the risk of an impasse due to lower business valuation.

Disadvantages

• Integration Challenges: Merging operations and cultures can be complex and time-consuming.
• Loss of Autonomy: The original company may lose some independence and culture.
• Deal structure: Deal structure may be complex, especially in situations where there is future equity participation. While this may be a financial benefit, understanding your equity rights need to be vetted and understand as it relates to valuation, liquidity options, and shareholder rights.

Private equity groups

Private equity (PE) groups are investment firms that pool capital from various sources, including high-net-worth individuals and institutional investors, to acquire and invest in business across various sectors with a focus on financial return. PE groups are not business operators themselves, and generally will not deploy management or operators into the businesses they acquire. PE groups typically target larger businesses to acquire, with minimum deal sizes. Oftentimes, PE groups will back or acquire strategic buyers or consolidators.

Advantages

• Capital infusion: PE groups typically have substantial financial resources to facilitate the acquisition.
• Growth opportunities: They may help the business expand through future acquisitions or strategic initiatives.
• Aligned interests: PE groups rarely acquire 100 percent of a business, instead partnering with existing shareholders and acquiring majority control. The equity alignment allows existing owners and management teams to participate in the future growth of the business and align interests. This is a good option for owners with a longer timeframe to remain in the business.
• Taking chips off the table: The option of selling only part of the business can be enticing for some owners — a significant percentage of which have the bulk of their net worth tied up in their company. PE groups offer the owner the ability to pull out some wealth that has been created, while continuing to drive the future growth of the business.

Disadvantages

• Size: PE groups will target larger companies with a view to consolidation and growth. A PE group rarely will they acquire single-location practices unless it already has a platform investment in a specific industry, generally making them a viable option only for sellers of a large-scale business. Instead, a seller should consider strategic or consolidators as a PE-backed option which can sometimes mimic some of the advantages of a PE deal.
• Time horizon: A PE deal will typically see the vendor carry on for a lengthy transition period until the next sale or liquidity event. This may not be the right fit for some owners who are seeking a more immediate full exit.
• Control: Some owners can struggle with continuing to drive the growth of the business without owning it outright.

Conclusion

Choosing the right buyer for your practice involves assessing your priorities and long-term goals. Each option has its merits and drawbacks, and deal valuations, structure, and terms — and each can look drastically different depending on the type of buyer you approach.

It’s crucial to align your divestiture approach with your vision for the future of your business and your personal objectives. Each of the types of buyers explored above have different approaches to the following deal parameters: Valuation, transition length, ongoing equity participation, next liquidity event, deal structure, future upside, control, due diligence, among others.

When considering a sale of your practice, consider these items to ensure the best outcome possible:

• Speak with a divestiture advisor early. The sale of your practice will take many months, and most purchasers require a post-closing continuation of employment transition.
• Writing down your most important objectives in a transaction to ensure the right buyer audience is targeted. What is important for one seller, may not be as important for the next.
• Depending on your corporate structure, you can maximize your after-tax proceeds by taking certain steps years in advance; you can reduce your risk of a tax surprise catching you off guard.

Retaining an advisor to assist you through the divestiture process also allows you to focus on what you do best: running your practice. MNP’s Corporate Finance group has a wealth of experience in the health care and professional services space, with advisors who are well-versed to manage the divestiture process to ensure you transition on the best terms possible.