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

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

Synopsis
4 Minute Read

An owner typically has four options for selling a business or professional practice:

  • internal buyout (i.e., employees or minority owner)
  • competitive buyer (i.e., competitor of similar size)
  • strategic buyer / consolidator (i.e., larger competitor)
  • private equity (i.e., firm representing independent investors)

Each option has specific benefits and drawbacks and is typically suited to businesses of a specific size and maturity and ownership goals. We review those here, so you can decide which option(s) may be most favourable for you and what you should be considering on your transaction journey.

Selling your company or practice can often be the most important business decision you will make as an owner. There are many types of buyers to consider once you’ve made the decision to sell, each with its unique advantages and disadvantages. We explore the different buyer options to provide some key considerations.

As with most critical business decisions you make, it’s important to speak with your advisor prior to embarking on this process. There are several complexities in a sale process that must be navigated carefully to ensure the best outcome.

Internal buyout

In an internal buyout, the buyer is typically a current employee (or group of employees), or existing minority owner. This individual or cohort has typically been with the business for a long time and has a deep understanding of the business.

Advantages

  • Continuity: Internal buyers often prioritize preserving the existing business culture, maintaining existing customer and patient relationships, and maintaining employee relationships.
  • In-depth knowledge: They already have a deep understanding of the business, reducing the seller’s transition period and learning curve.
  • Limited due diligence: Given the existing familiarity, this type of internal transaction typically requires the most limited amount of financial and operational due diligence prior to purchase.
  • Employee morale: Other employees may feel more comfortable with a familiar face transitioning into ownership.

Disadvantages

  • Employee morale: Some employees may not share with the owner’s view of who should purchase the business. This can lead to feelings of favoritism, jealousy, or of peers being gifted ownership despite lacking underlying transaction knowledge. These feelings can cause other staff to leave, creating risk to the continuity of the practice and potentially jeopardizing the seller’s payout depending on the deal structure.
  • Financing: Internal buyers may struggle to secure the necessary financing for the purchase. This can result in a reduced valuation in order to get the deal done, vendor financing, extending time to close, or a combination of the above. These challenges are heightened in higher-valued businesses, to the point they can become insurmountable.
  • Valuation: Negotiating a fair price can be challenging when emotional ties are involved, and when there is a lack of multiple offers or third-party offers to validate the transaction value and structure.

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.

Close the deal with confidence

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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.

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