None of our clients have unlimited capital. Capital is a limited resource that has to be rationed for mergers and acquisitions. Here are eight tricks for stretching your M&A capital budget.
1) Avoid the majority interest, control premium. Minority ownership interests cost less on a per share basis than majority ownership interests. The typical control price premium is 25% to 35% higher on a per share basis.
2) Consider investments in kind. This past year a health system was developing a $160 million proton therapy center. To reduce its capital investment, the health system traded $80 million of equity in the $160 million project to an equipment vendor that contributed the proton therapy equipment. The health system reduced its capital investment by $80 million.
3) Use an earn out provision. An earn out provision is intended to ensure a smooth transition from the seller to the buyer by deferring part of the sellers compensation to a future date while also tying the final payment to business performance. For example, typical terms might include cash payment for 66% of business ownership today, while the last 33% of ownership is agreed to be redeemed 30 months from now at whatever Fair Market Value is appraised to be at that future date.
4) Assume the seller’s debt. If you are buying a business that has debt, the value of the company will always be the same, but the purchase price paid will vary depending on who pays the debt. For example, assume an imaging center that is appraised at $10 million has a $4 million loan. If you don’t assume the debt, you could pay the seller $10 million and the seller could pay the $4 million. Alternatively, you could assume the $4 million debt as the buyer of the business and only have to pay the seller $6 million.
5) Leverage your investment. Private equity firms wouldn’t make their robust profits and management fees without augmenting their investments with debt. You can do the same. Lenders will assist in financing business purchases of stable businesses with a history of growing earnings.
6) Ask for seller financing. If your budget is tight and you don’t have the time or inclination to go through a lender, you can ask the seller if they will let you make payments directly to them for part or all of the sale price. See if the seller will let you make interest bearing payments over a period of several years.
7) Buy the business, lease hard assets. You can push equipment off the balance sheet into lease arrangements. Just like seller financing, this will lower your upfront purchase price while generating some interest income for the seller.
8) Trade salary or management fees for purchase price. You might consider a two or three year management arrangement with the previous owner to ease the transition. If the previous owner was entirely compensated from earnings, with no salaried compensation, this is another way to push some consideration out a few years.
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HCTadvisor provides healthcare-focused business data. Contact HCTadvisor today at (303) 800-6444.