Exclusivity is a tactic that is used by potential buyers in order to ensure that all attention in a potential healthcare business transaction is on them and no one else. While this tactic may put the buyer at a perceived advantage, there is always the opposite side of the coin that shows exclusive negotiations can be a potential downside for the seller in the situation. The Ambulatory M&A Advisor takes a look at the pros and cons of exclusivity, and when it may be a good time to decide on selling a healthcare business through this process.
Steven Gravely, partner with Troutman Sanders LLP says that exclusive negotiations can go by a variety of names like no shop clause or exclusivity.
“The idea is that the target, whether it is a physician practice or not, the idea is that while that agreement is in effect, the target is not going to go out and look for other partners or other vendors for the same services,” Gravely says.
According to Gravely, exclusive negotiations are actually quite common in healthcare transactions because the management company or the acquirer is concerned that they are going to invest time and money in the target. Then, if the target is out there shopping themselves to three or four different acquirers or competing entities, obviously, there is a much greater risk of the deal falling through.
“When this happens, you have ultimately wasted your time and your money from the point of view of the management company or the acquirer…They like to tie up their targets for some period of time in hopes that it will increase the likelihood that the deal gets closed,” Gravely says.
In some circles, the terms of an exclusive negotiation can be deemed a “trap.” Gravely says the reason that it could be called a trap from the perspective of the target or the physician practice would be because the seller can only negotiate with one party and are not necessarily able to have other parties compete with each other for your practice.
“So, it can be a bit of a trap. I think that the way you avoid that is to do your diligence before you decide to sign that type of agreement. This will enable the seller to be satisfied that they are talking to the first choice and this is the group that they would like to work out a deal with. In that case, the exclusivity is not a trap for you because you are dealing with your partner of choice any way,” Gravely says.
Blayne Rush, Investment Banker, President of Ambulatory Alliances LLC believes that competition is key to a successful transaction. Rush believes that instead of settling on one specific potential buyer, courting multiple potential buyers will ultimately help the seller come to a purchase price that they are comfortable with.
“Each buyer you speak with will come up with a different number based off of what is best for them. Therefore, it’s always disheartening to see an owner settle on negotiating with one buyer and limit themselves to whatever number that one buyer works up. Rather, they should request bids from multiple buyers and multiple buyer types,” Rush says.
Rush explains that when examining numerous offers from competitors there will be a notable variety of the offered purchase prices.
Rush explains that a variety of proposals will present a few purchase proposals notably lower than the rest, most will be close together around the average, and importantly, Rush says sellers will receive some that stick out higher than the rest of the competitors.
Rush goes on to say that in order to see numerous bids for one’s business, they must start with a broad group of buyers and not fall into an exclusive situation right off of the bat.
“If you only get one offer, it could be anywhere; it could be the worst! If you only get two prices, they could both be on the low end, or one could be average and one would be low. In that case, you’d end up settling on an average price, and leaving a lot of money on the table. The only way to know you’ve found a good buyer for your business, who’s offering you the best price and terms for your business, is to compare that buyer’s price against a broad population of other buyers in the industry. Statistically speaking, you have more certainty you’re picking the premium price and terms if you’re looking at a larger population of bids,” Rush says.
“The interesting thing about soliciting multiple bids at one time is that not only will you gain more knowledge about what your UCB is worth, but you will spur better offers from individual buyers. In certain environments, just knowing that other buyers are out there competing for a UCB will encourage potential buyers to put their best bid forward.”
Gravely says that in the case that a business has exclusivity with a potential buyer and the deal does not go through, there are some crippling implications that the failure of the deal can have on a seller.
Aside from not being able to unload the business at that desired time, the failure of an exclusive negotiation can cost the sellers money, Gravely says.
“Sometimes there is a breakup fee, where if the deal does not go through the seller will have to pay some amount of money to the buyer. That is not very typical. You see that more in larger commercial transactions, but every now and then, you will see that, and I would advise a practice to not agree with that,” Gravely says.
“In fact, I would agree that it is the practice that ought to be paid the breakup fee if the deal does not go down as opposed to the management company or acquiring entity.”
Aside from potential breakup fees, Gravely says there is another issue in the opportunity cost of the time that it takes to go through a failed exclusive negotiation.
Gravely says such deals can take months, and while a seller is tied up with one partner, the market is changing around them and they may miss out on other opportunities. This could end up leaving the hopeful seller with nothing.
“Your deal falls apart, and maybe the other people that were interested in you have moved on to another market or have done a deal with your competitor. There is a risk there that if your deal fails to close, and you are left with fewer to no options than you had at the outset,” Gravely says.
Glenn Truitt, managing partner at Ideal Business Partners says the primary risk is that the seller is going to lose out on possible other buyers that may be willing to pay more.
“An auction isn’t an auction if there is only one bidder. That is really the risk. You fall in love with the buyer and you don’t understand what is out there; not just in purchase price, but in terms of other structures, possible advantageous deal terms for the existing owner. You don’t get a sense of the market if you don’t let the market in,” Truitt says adding that a seller may even be able to exact a non-refundable deposit as consideration for exclusivity, but that oftentimes is fool’s gold.
Truitt says that exclusivity is obviously something that a buyer would push for, but in the end, it is all based on a timing issue.
“In general, with an attractive target, I would say wait until you have more than one viable LOI submitted. See if you have got more than one buyer before you commit to one,” Truitt says.
“The only exception I would say is if someone like Tenent Healthcare called up and they want exclusivity and they want it for a reasonable period of time, like 60 to 90 days, then you probably say yes. Especially if you want a fast mover and you are a very motivated seller. In general I would say not to be exclusive until you have more than one interested party on the table so that you know what you are giving up.”
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.
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