The current environment for healthcare transactions is fiercely competitive with high prices, tough deal terms and limited time for proper due diligence. In terms of both value and number of deals, 2018 was the biggest year for health care private equity (PE) since the financial crisis. More large cap PE firms are moving into the small and mid-cap space, increasing competition. At the same time, non-health-care entrants are competing with US and international PE, especially in the area of physician practice management and other related health care services.
Faced with this stiff competition, sponsors are getting more creative in their healthcare partnerships, whether that means partnering with management teams on new strategies, partnering with large strategics or even with one another. These innovative collaborations can open up more investable opportunities, including public to privates and secondary trades among sponsors.
Even with these creative new opportunities, submitting a winning bid for a health care services business in a hotly contested auction can be a Herculean task. When outbidding the competition is not an option, here are some tips to help differentiate your offer:
- A clean and straightforward deal structure, without too many bells and whistles and with a good opportunity for upside value, can help your bid stand out from the pack. A clean structure reduces ambiguity and gives the sellers confidence that your healthcare deal is the right choice.
- Offer, and have details for, management incentive plans and performance based packages. This not only makes your bid attractive—it align interests.
- Build solid relationships with management to give you an edge on any “soft tissue” related matters. Be mindful of first impressions, down to the tone in which you and your advisors ask questions. In diligence calls, start by thanking management for their time; be polite and positive. Train your advisors to do the same, so that you have coordinated messaging and leave the seller with a positive impression after every single interaction.
- Finally, make sure you are able to communicate clearly why you are the best partner and owner. Perhaps you have a focus on their practice specialty and/or have previously addressed two or three issues they have been facing – showcase that you understand the regulatory nuances of their sector and proactively address their pain points in your pitch. Demonstrate that you truly understand the seller’s objectives and take the time to craft a shared vision of your goals for the partnership.
This hyper-competitive healthcare deals market makes it tougher to win auctions based on money and incentives alone. Clean, simple deal structures and strong interpersonal skills like relationship-building can set you apart as more than just a bidder that wants to win an auction, but a partner that shares the seller’s vision and wants to grow the company accordingly.