Deal Cycle

The deal cycle can vary but after an initial introduction and genuine interest moving forward typically a Non-Disclosure Agreement (NDA) is signed followed by an initial information request which allows the Partner to get a good general understanding of the business. After review of the information, the Partner will provide an Indication of Interest (IOI) or a Letter of Intent (LOI). This is a document that describes the valuation of the business as well as key terms going forward after a sale.

Both documents are non-binding but come with an agreement of confidentiality and a period of time for the partner to have exclusive rights to work with the local company.

Next comes extensive due diligence where the CBP will do a deep dive into the business from a financial, clinical, regulatory, and legal standpoint. Finally, the legal documents are negotiated thoroughly and a final definitive agreement is signed and the transaction is completed.

Timeline

INTRODUCTION

NDA & INFORMATION REQUEST

4-8 Weeks

INFORMATION RECEIVED AND REVIEWED

3-4 Weeks

LOI OR IOI SUBMITTED

2 Weeks

FULL DUE DILIGENCE OF THE BUSINESS

6 Weeks

LEGAL DOCUMENTS NEGOTIATED

4 Weeks

DEFINITIVE AGREEMENT SIGNED

3 Weeks

What to expect after the transaction

Most CBPs put together a plan going forward whether it is 60, 90 or 100 days. The best CBPs will review along the way to ensure for optimal success. An integration plan is essential as the new capital partner wants each of the businesses operating in the same manner so it is fully integrated. Additional integration will continue with each new partner.

As the company grows, the CBP must determine the timing and opportunity for its shareholders to receive their return on investment (ROI) based on when the fund was set up with the CBP. This typically happens in 3-5 years from the initial company platform and is called the first bite of the apple for the capital company. If equity is involved with the local company that is partnering, it is the second bite of the apple. For most of the beginning original local partnering companies, this equity recap will be more valuable than the initial valuation of the business. This is one of the key reasons that being on the beginning of the new platform company and taking that risk with equity is a much higher payout than after the company is 3 years old and a group onboards.

Example: Valuation of the Business is $8 million and the components of the purchase price is 70% cash ($5.6MM) and 30% equity ($2.4 MM) all taxed at a capital gains tax.

In 3-5 years, let's say the equity component when the CBP recaps or exits to another CBP is 5 times equity or $12MM ($2.4MM x 5). Making the value over the whole time period (3-5 years) is worth $5.6MM cash and $12MM equity cash out or $17.6MM after 3-5 years. You see the equity is worth more than the valuation so more importantly is who you partner with and their previous experience versus a valuation. Or, a high cash valuation and a low multiple of equity, you would be better off going with the CBP with more experience not only from a financial interest but also from the culture and working relationship.

Key Questions for Local Businesses to Ask & Understand

How long have you been in private equity?

What is the thesis of this business?

Tell me about some of your sucesses as well as some that did not work as well.

How involved are physicians in the business in making decisions?

Does the local company maintain its current branding and name?

What are the components of a valuation?

If equity is part of the valuation, is it the same as the PE company or subordinated?

Tell me about your recaps or exits. What has been your experience with cash-on-cash returns?

On companies where you have recapped was it to another PE company or an institutional investor?

How are your company boards made up? Are there any physicians on the board?

Can you define the components of a successful company strategy?

What is your debt-to-equity ratio in the business?

Get In Touch

3 Evan Ridge Court, The Woodlands, TX 77381

larrynail@lcnhealthgroup.com

210.410.1974