How To Sell a Healthcare Business – The Complete Guide to Selling Your Business

The healthcare industry has been a cornerstone of innovation and dedication to improving lives. As times have evolved, the healthcare landscape has transformed due to technological advancements and global progress. In this new era of healthcare, the demand for quality services has never been more significant.

If you are considering selling your healthcare business and aiming to maximize its value, Raincatcher is your trusted partner. Renowned as a leader in healthcare M&A, we’ve earned recognition as the top business broker, according to Inc. magazine. Like any meaningful endeavor, selling a healthcare business demands time and dedication to attract the right buyers. While there’s no universal formula for the selling process within the healthcare industry, we customize our approach to ensure the best possible outcome for your business. This article outlines the journey of selling your business, from gathering essential documents to the final closure.

Process of Selling a Healthcare Company (at a glance)

If you have decided to sell all (or part) of your healthcare company, here is a glimpse at what the process will entail over the coming year:

  • Build a strong deal team: Align yourself with a business brokerage firm (for deals under $10m) or M&A firm (for deals over $10m) that has proven success representing healthcare companies. Find a proven M&A attorney (we can introduce you to several groups we’ve succeeded with), and a tax attorney.
  • Compile your materials: Your M&A advisor (Raincatcher) will request a litany of documents from you. This includes financial statements, organization charts, supplier and customer contracts, employment agreements, etc.
  • Market the deal: We create an expansive document and financial forecast for your company and then bring it to market. Most of this work falls on our shoulders as we have an expansive database of investors for companies of all industries.
  • Receive IOIs: Depending on the size of your deal, your advisor may suggest that you market the deal and push for LOIs. Or, if your business is large enough, we look to secure IOIs ahead of time so that we can shortlist the most capable buyers and present them with more information and meetings before receiving an LOI.
  • Management Meetings: Should it fit your business, your broker will join you in hosting investors for a week to share additional information about your manufacturing company.
  • Receive LOIs: ‘best and final’ bids will be received after hosting the most capable buyers for meetings.
  • Sign an Exclusive LOI: After some negotiation, we help you select the most capable buyer based on their price, terms, likelihood of closing and plans for the company.
  • Due Diligence: The buyer and their advisors kick off another 60-90 days of thorough investigation, leaving no stone unturned in examining every aspect of your company.
  • Close: Closing time. The deal is done, and you’ll typically get 80% – 90% of the payment for your business now.
  • Transition: After closing, the buyer will typically require the sellers to stay behind and assist in transitioning the business to them for an agreed-upon period of time.

Hear From Previous Clients Who Sold a Businesses With Us

What Determines the Valuation of a Healthcare Business?

Lower middle market healthcare businesses (sub $15m EBITDA) trade across a fairly large range, depending on how desirable they are. A healthcare company that trades for a high multiple (~10x) has many of these traits:

  1. Patient Base and Relationships: A loyal and growing patient base is often seen as a positive indicator.
  2. Market Size and Growth: Businesses in growing and high-demand healthcare sectors may command higher valuations.
  3. Technology and Innovation: Healthcare businesses that leverage innovative technologies, telemedicine, electronic health records, or other advancements may be valued higher due to their potential for efficiency and growth.
  4. Management Team: A capable and experienced team inspires confidence in potential buyers or investors.
  5. Geographic Location: Businesses in areas with high demand and limited competition might have higher valuations.
  6. Regulatory Environment: Healthcare is heavily regulated, and compliance with regulations is crucial. The business’s ability to navigate these regulations and maintain compliance can impact its valuation.
  7. Earnings and Cash Flow: Predictable cash flows are essential for healthcare businesses as they often have significant operational costs.
  8. Reimbursement Structure: In the healthcare industry, reimbursement rates from insurance providers and government programs can significantly impact financial performance. Businesses with favorable reimbursement agreements are valued higher.
  9. Assets and Liabilities: The value of tangible assets (such as medical equipment, real estate, and facilities) and intangible assets (such as intellectual property, brand reputation, and patient relationships) is considered.
  10. Exit Potential: The potential for an investor to exit their investment later, such as through acquisition or IPO, can influence the valuation.

 

The fewer criteria your healthcare company meets, the lower the multiple will slide. Although rare in the space, some healthcare companies don’t sell at all. However, these are typically small companies (less than $500k profit).

As noted above and illustrated in this chart (specifically referencing home healthcare companies), the business valuation of a healthcare company can range greatly. Below, we’ll dig into some of the more critical factors determining manufacturing company valuations.

More Healthcare Resources

One of the most common questions we get from business owners is about valuation. We put together a healthcare valuation multiples guide that we think you’ll find helpful.

Financial Performance

The historical and projected financial performance of your healthcare business is a critical determinant of its valuation. Prospective investors will require access to updated accounting records, financial statements, and documents such as tax returns. These records will be scrutinized to assess elements like revenue, profitability, cash flow, and growth patterns, all of which contribute to evaluating the financial strength and potential returns on investment of the business in the healthcare industry.

In the realm of healthcare, the size of the business often correlates with its valuation. For instance, a healthcare business generating $500k in annual profit might command a valuation multiple that is lower compared to a similar business generating $3m in annual revenue.

Investment groups place great importance on maintaining a margin surpassing 20%. Healthcare companies with healthy profit margins signify that the business possesses a competitive advantage and stands apart from its peers within the industry. This differentiation indicates a strong position and unique qualities that set the healthcare business apart from competitors.

Industry Segment and Market Conditions

The industry and market conditions in which the healthcare business operates play a crucial role in its valuation. Factors such as market demand, competitive landscape, barriers to entry, and industry growth potential impact the business’s perceived value.

Generally speaking, the more niche an industry is, its total addressable market is smaller. However, it is likely that they have few competitors in that niche and can therefore have more repeat business and more durable earnings. Investors will have different views on niche markets, with most buyers liking them and others disliking them for their limited growth prospects.

Growth Prospects

Buyers evaluate the growth potential of a healthcare business to ascertain its worth. Aspects such as service portfolio diversification, avenues for expansion, market reach improvement, innovation capacities, and patient/client base all play a pivotal role in gauging the business’s future growth possibilities and subsequent influence on its valuation.

Even within the healthcare sector, the specialized business we previously mentioned could exhibit promising growth potential by identifying related healthcare domains to venture into and services that they can provide.

Assets and Intellectual Property

The tangible and intangible assets of the healthcare business can also impact the company’s valuation. This includes medical equipment, machinery, real estate, furniture and fixtures, lab equipment, IT products, and patient records and data. Well-maintained assets and valuable intellectual property can enhance the business’s value.

Generally, companies with modern facilities using high-quality equipment will trade at higher multiples than those with more commoditized products.

Additionally, companies with solid teams are seen as more desirable and able to transfer leadership over to a new owner. While this asset doesn’t go on the balance sheet, employees are critical to the business.

Customer Base

The strength and stability of customer relationships serve as a testament to the quality of care offered and form the foundation of the business’s reputation and success. A loyal and diverse patient or client base signifies the business’s ability to meet varying medical needs, establish lasting relationships, and foster a sense of trust within the community. Ensuring consistent and recurring revenue for the business.

What is the Process of Selling a Healthcare Business?

While it may not be a fit for all clients, most entrepreneurs we work with who run healthcare companies will see the most competitive price and terms for their business coming from a well-run auction process.

Auction processes typically take 7-9 months to complete. On certain occasions, we may recommend that our client hire an accounting firm to complete a quality of earnings analysis before we start the auction process. In our experience, this cost and time is justified and can manifest itself in 5% – 15% hire exit values.

We’ll go into each of the steps of an auction process at a high level below:

How we Maximize Exit Proceeds for our Healthcare Clients with our Auction Process

Sell-side due diligence

Due diligence is traditionally done by business buyers and not business brokers. However, our comprehensive sell-side process includes a diligence process before we bring a business to market. 

Our comprehensive diligence and sale process is designed to drive the highest value for the business owner as buyers know that there won’t be any skeletons in the closet once they submit an offer and start spending money on legal and financial diligence.

 

Specially designed brokerage or M&A auction process

Depending on the size of your business and industry your company operates in, we may recommend a traditional brokerage process with a listing price. Or, a competitive auction process with buyers submitting the price and terms for negotiation. 

Our buyer list is comprehensive and will be tailored to include (or exclude) and participants in your industry who may make great strategic buyers or who you want to avoid knowing the business is on the market for sale.

Short-listing finalists

It isn’t uncommon for strong, sizable companies to get 5+ indications of interest (soft offers). We’ll then validate those buyer groups, attend dinners where they meet out clients, prepare further data on the business and negotiate the deal terms that the prospective buyers will propose in their final offer.

.

Negotiate LOI terms and facilitate diligence

Once LOI’s have been received from potential buyers we work with our clients to select the potential buyer with the most attractive offer before executing the exclusive LOI.

It’s common for diligence to take 60-90 days before closing. This requires a significant time commitment from all parties. Additionally, final deal points are negotiated and contested during this period.

Talk to the experts

Care to learn more about Raincatcher’s brokerage and M&A processes and what we can do for your business? Get in touch with us for a complimentary consultation.

What Affects the Market's Appetite for the Healthcare Industry?

In the healthcare sector, businesses with a consistent and enduring need for their medical services and treatments and a loyal base of recurring patients or clientele tend to attract significant attention from various investors, including private equity firms, strategic buyers, and healthcare-focused investment funds.

Investor interest in the healthcare industry is influenced by the stability and predictability of patient demand for medical services, the longevity of treatment needs, and recurring revenue streams. Like all industries, the healthcare industry’s attractiveness to investors is intertwined with prevailing economic conditions and financing costs.

Thinking About Selling?

If you are entertaining selling your company, feel free to request a consultation with one of our healthcare business brokers or M&A specialists to learn about our unique process and why we believe it is the best in the industry.

What Role Does Technology Play in Investors Analysis of the Healthcare Industry

Strategic buyers and private equity groups alike are interested in buying companies at a discount to the cash flow they can take out of them over the coming decade. There are a few ways they go about this:

  1. Invest in companies that can grow significantly.
  2. Acquire highly differentiated companies and therefore have a very stable, predictable client base and cash flow.


In both cases, 
having a modern facility with leading-edge technology and equipment makes your business far more desirable to investors. Either this technology will be leveraged to grow the business. Or, it is seen as a differentiating factor to separate from the competition and create a higher margin and more durable revenue stream.

Companies with specialized services often trade at 30%-40% premiums to their more commoditized peers.

Request a Consultation

At Raincatcher we represent sellers of exceptional lower middle-market companies. Generally speaking, these companies generate anywhere from $2m – $100m in annual revenue. We were even named the #1 business broker by Inc. magazine.

Our team is comprised of former business owners, public accountants and investment bankers. Included in this group is two of our partners who each spent over a decade working at middle-market investment banks where they represented manufacturing companies. This is one of the reasons we are seen as an expert in the manufacturing space.

request a consultation today to review your market value, discuss what type of exit process would make the most sense and meet our team of advisors who have real-world experience selling manufacturing companies.