Top 11 Reasons Healthcare Companies are Slow to Sell.

Top 10 Reasons Healthcare Companies Are Slow to Sell

As a healthcare Merger and Acquisition advisor covering 50 different verticals with nearly 1.3 billion dollars in active listings, I come across many companies sold within days while others are slower to sell or never sell. I am sharing a compilation of what I think are the top 10 reasons healthcare companies are slow to sell in this article.

1. Niche Focus

Companies focusing on a niche sector in healthcare or highly specialized, with a limited number of potential buyers, often face more challenges in finding buyers. Less specialized or serving a niche market is more likely to find buyers. For example, a dental group focused on bread-and-butter type general dentistry could sell much faster and at a much higher valuation than a group focused on full-mouth rehabilitation.?

2. Location

Companies in remote areas or difficult to access will have a limited number of buyers. Investors' concerns will be employee recruitment, higher cost of labor to encourage relocation, and overall supply chain logistics. Companies in highly regulated, employee-friendly states or tight labor markets will also sell slower.?

3. Companies without a Moat

According to the most famous investor of all time, Warren Buffet,?

"The most important thing is trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle," Companies that are easy to replicate, set up and operate, or depend on heavy sales activities, are less appealing to buyers and investors. Companies with solid moats will have a higher barrier of entry and fewer threats of substitutes by their customers.

4. Owner-Operator Risk

In article No. 3, as part of my series, Value Engineering: How to sell your company at a premium, I discuss the importance of firing yourself from the business for at least one to two years before considering a sale. Buyers shy away from investing in companies whose revenue or business sustainability depends on the owner. Companies with solid management teams, robust systems, and processes independent of key individuals to operate the business often get fast offers and sell quicker than those that depend on the owner/founders.

5. Upfront Payment for Future Earnings

Owners looking to sell projected earnings are less likely to get fast offers and sell their companies in a meaningful period. Investors prefer to pay for historical performance rather than future projections. Still, they will consider an earnout bonus for the owner if the business can meet certain financial milestones. However, owners who insist on valuations beyond 12 months based on projected performance may face disappointment in entertaining offers.?

6. Declining Revenue

Companies declining in revenue will have less chance of selling fast as buyers become concerned about the permanent decline. Unless Sellers can show a reduction in income is only temporary due to an event, or macroeconomics can often overcome this objection. In some cases, where the revenue dropped because the company got rid of low-paying customers, but the seller can show a higher profit margin by focusing on higher-paying customers, declining revenue may be less critical in selling a company.?

7. High Revenue from Only a Few Customers

Companies with a high concentration of customers generate a large portion of revenue and are less likely to get offers early in a selling journey. Investors' concerns would be that losing a key customer can affect the company's performance, which will be a high investment risk. Thus finding a buyer for this type of company may take more work, resulting in a slower sale.

8. Location Dependent

Businesses that depend on their location to carry out their business activities could raise a concern for a buyer. Long-term leases with an option to renew alleviate some of the fear investors may face that prevents them from placing an offer on the business early enough.

9. Inaccurate or Messy Financials

One of the biggest hurdles I see in receiving offers early on is messy financials or inaccurate financial statements. Businesses with accurate financial reporting make it easy for buyers to perform their due diligence and become confident about their investments. Certainty rather than confusion sells. Therefore accurate financials is a must.?

Having proper financial documents speaks volumes about a company's financial health. When ready to sell your company, always talk to your accountant and bookkeeper about expecting their utmost cooperation in providing the necessary financial information cleanly and concisely.

10. Individual Conflicts and Egos

Because many people are involved, both from the buyer and the seller side, conflicts can delay or kill deals. It is essential for all parties involved to understand their roles are less important than the overall goal of achieving final results and know no one is indispensable and anyone can be replaced on a deal team. I have seen several attorneys who want to justify their fees and raise unnecessary objections during negotiations or due diligence, which may result in one party or another withdrawing from the transaction. It is always best for a seller or a buyer to manage these situations early on and show your support in changing team members if there are conflicts or egos.

11. Priced Too High

One of the main reasons that listings are slow to sell or never receive an offer is owners ask too high of a price for their companies. Often, they are emotionally attached to their business and don't see it from the buyer's perspective. On the other hand, many Buyers think they can lowball a Seller in hopes of acquiring the business for less. Because of these reasons, I always require an early Letter of Intent (LOI) from the Buyers to ensure alignment on valuation from EBITDA (Earning Before Interest, Taxes, Depreciation, and Amortization)

The biggest mistake Sellers make is waiting too long to speak to an intermediary about an exit plan and steps they must take to increase the valuation of their companies and prepare documents for marketing. Preparation is the key to any successful transition, and Sellers must become proactive to demand premium valuation for their companies.

Dr. Allen Nazeri ( Dr. Allen ), has over 30 years of worldwide experience as a healthcare entrepreneur. He has been actively consulting leadership teams of some of the largest privately held and publicly listed companies on strategic growth and preparing them for an eventual successful exit. Dr. Allen has a Dental Degree from Creighton University and earned his MBA in M&A and Investment Banking from the University of Bedfordshire. He is the author of Value Engineering: Strategies to 10X the Value of Your Clinic and Dominate the Market!?Dr. Allen offers a Free Valuation to company owners who are ready for a partial or a complete exit.?Dr. Allen works with a large compendium of strategic buyers, private equity firms and a few institutional investors seeking high quality healthcare investments. You may contact him via [email protected].