Prospective sellers frequently ask us: “What are the costs associated with selling my healthcare business?” The transactional costs of selling your company go beyond an M&A Advisor’s compensation and usually include attorney’s fees, CPA costs, and other expenses associated with third party support (your Transaction Team). The expenses related to comprehensive transactional support can sometimes surprise sellers, who are unfamiliar with the intricacies of a formal M&A process.
In this article, we address the question at hand, highlighting typical fees associated with each support role and tips on how to select a transactional team who will put you in a position to achieve maximum value.
M&A Advisory Support & Associated Fees
Identifying a Mergers & Acquisitions Advisor (M&A Advisor) to guide you through the journey of selling your company is the most important decision you will make in the sale process. As we have discussed in previous articles, an M&A Advisor will do significantly more than find the right buyer or investor for your business[1] . An Advisor’s involvement will increase the probability of a successful transaction while reducing the burden placed on you as a seller during the process. Hiring the right Advisory Firm should be a seller’s top priority when preparing for a sale. You should take the necessary time to speak with several firms and be thorough in your vetting. (For more information on how to properly vet your intermediary, consider these 5 tips).
Typically, an Advisor will receive compensation in two ways:
- Through a one-time or recurring retainer at engagement (see details in Additional Costs section below)
- Through a success fee upon the close of a transaction.
While intermediaries typically utilize different payment schedules to dictate the fee owed, most use a tiered approach correlating a certain fee percentage based on the sale price of the business.
M&A Advisory Success Fee Structures
At M&A Healthcare Advisors, the size of your company and your unique story will ultimately dictate our approach to the fee structure. Overall, our fees are competitive and more favorable than competing Investment Banks. In previous transactions, we have utilized a variety of methods to calculate our fee structure including:
- A Reverse Lehman Formula
- This is a sliding scale with a direct correlation between commission and sale price, meaning the percentage of commission increases as the price consideration to the seller rises. We suggest this approach as it completely aligns our financial benefit with your (the client’s) financial benefit, providing an incentive for us (the Advisor) to drive the height of the market valuation. This pricing structure is most often employed when dealing with larger companies, which will far exceed our firm’s minimum commission payment.
- Flat Fee
- A flat fee can often range from 3% - 6% of the total purchase price, depending on the profile of the business. We may employ this structure with smaller companies based on their current EBITDA.
- A flat fee can often range from 3% - 6% of the total purchase price, depending on the profile of the business. We may employ this structure with smaller companies based on their current EBITDA.
- A third fee structure worth noting is the Double Lehman Formula
- This is a sliding scale with an inverse correlation between commission and sale price, meaning the percentage of commission drops as the price consideration to the seller rises. This structure, in addition to flat fees, is typically used by finders and business brokers in the lower-middle market. At MAHA, we typically don’t utilize this approach as it doesn’t align ours and our client's goals, since the bulk of the success fee is reached within the first few pricing thresholds. An example of a Double Lehman would be: 10% on the first million in sale price, 8% on the second million, 6% on the third million, 4% on the fourth million , and 2% on the remaining balance.
Note on Business Brokers, Finders, M&A Advisors, and Investment Banks:
The size of your company may dictate the type of deal support you engage. Be cautious not to be penny-wise and pound-foolish.Using a Finder, as an example, will put you in front of buyers but, thereafter, they will provide little to no support. Whereas working with an Investment Bank can afford you the full range of transactional options and legal compliance. Successfully completing a transaction for a small deal can often be just as complicated as a larger deal. We suggest identifying an intermediary that is committed to your success. Leaving sellers to fend for themselves in a sale process will lead to massive bottlenecks and, most likely, a failed transaction.
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Additional M&A Advisory Costs - Fully Credited in Success Fee
In addition to our success fee at closing, we have two fees that trigger prior to the closing of a transaction; one of which is our retainer upon engagement or on-going based on scope of work, and the other at the signing of a Letter of Intent (LOI)[2], which we refer to as a “milestone payment”. These payments can range from $10,000 to $20,000 based on the size of the seller’s company and are ultimately credited toward our success fee due at closing. The retainer and milestone are both a symbol of commitment to the process by the client as well as an acknowledgment of our time, efforts, the quality of our work, and access to the larger network of resources we provide.
An M&A process is most effective when there is a high level of mutual commitment between the seller and their Advisor. It is vital that each party’s financial goals are aligned. It has been our experience that those who recognize the importance of an M&A Advisor’s role in the process and the work it takes to achieve a successful outcome, are much more committed to the sale process and ultimately more likely achieve a successful outcome. This outcome usually exceeds seller’s expectations. It is important to note that we are flexible with our retainer, milestone fees, and our success fee at closing which are always tailored to the unique needs of our client.
Legal Support & Fees
Having comprehensive legal support available to you throughout the transaction is essential to a successful M&A process. Typically, law firms bill hourly and, after receiving their initial retainer, are paid from their balance from proceeds of the transaction at close. On average, attorneys’ fees on the sell-side equate to around 1% of the transaction cost, and usually have a floor of $50,000 and a cap of $500,000. We should note that our involvement will help to reduce the legal burden on the seller. While we are not attorneys, we can provide preliminary review of specific contracts in diligence and gather disclosure schedules, helping to reduce the number of billed hours.
While you may already have an attorney that assists with the operations or general liabilities of your business, it is important to hire legal support that has transactional experience and expertise, working to ensure your post-transactional risk is as low as possible. Also, it is helpful to work with a legal firm our attorney who has experience in healthcare laws.
Financial Support & Fees
Similar to Advisory and legal support, we recommend that a transactionally minded CPA be involved early, even prior to the official start of the sale process. Depending on the financial firm engaged, this support role can be priced by project or per hour. For example, an experienced CPA can cost upwards of $5,000 per month and would exist to provide support for the duration of the preparation and sale process. Another approach is to engage a financial firm to conduct a pre-acquisition Quality of Earnings (QoE). This project can cost anywhere from $40,000 - $75,000. The cost is high, but if you can conduct a QoE before going to market it will provide the highest level of confidence in the data you are presenting to the market of buyers, validating your books & records, and expediting the subsequent due diligence phase of the transaction.
Having an experienced CPA on your transaction team further drives credibility of your financial data, which in turn helps ensure the purchase price is not adjusted based on unanticipated findings from the buyer. Your financial data is also the backbone of the Information Memorandum and has the potential to lead to a failed process if the data is inaccurate or unreliable.
Clinical Support & Fees
Lastly, healthcare operators are under immense scrutiny relating to patient data (charting) and healthcare compliance. We encourage sellers to work with a third party to review their clinical operations to ensure that procedures, such as coding, are being done properly. This has the additional benefit of possibly increasing reimbursement to a seller’s company. With third-party reports, the seller can validate that their business has mitigated its liabilities while operating at the highest standard. Fees associated with this type of support can range depending on a variety of factors.
> For recommendations on our preferred transactional legal, financial, and operational analysis support resources, contact us for more information. <
An M&A process is most effective when there is a high level of mutual commitment between the seller and their Advisor.
It is vital that each party’s financial goals are aligned. It has been our experience that those who recognize the importance of an M&A Advisor’s role in the process and the work it takes to achieve a successful outcome, are much more committed to the sale process and ultimately more likely achieve a successful outcome.
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Conclusion
Having a team of committed transactional support on your side will not only ensure the sale process is more manageable as a seller but will make a successful outcome more achievable. In many cases, it is likely to increase your market valuation, as well. At M&A Healthcare Advisors, we strongly advocate that a transactional team be assembled prior to going to market. We have a large network of resources whom we can refer, based on your budget and M&A goals.
We have detailed the costs associated with sale process. Although they may seem high, the seller must consider the immense benefits derived from engaging qualified support. In our experience, sellers who invest in a experienced transaction team and properly prepare their company for a sale process reap benefits far in excess of any associated costs.
The key member of this transaction team is an expert M&A Advisor who will unify the support team around achieving a seller’s transactional goals. For further information on how we can assist you and the costs associated with the sellside process, contact us today.