Authors: Jim Audette and Bill Schloth

M&A in healthcare has been changing since the 2020 COVID landscape. Healthcare delivery shifted to telehealth and telemedicine, and then AI has created a swath of new companies enhancing care. Acquisitions slowed down in the middle of 2023 because of recessionary concerns, but has been picking up in 2024. Notably, a recent PWC survey found that “54% of Health Industries CEOs say they plan to make at least one acquisition in the next three years.” Now that we are well into 2024 and the economy seems stable, ASA is receiving over 200 monthly inbound outreaches from healthcare acquirers. Any company integrating technology and healthcare delivery, providing home health or outsourcing services for healthcare facilities is receiving higher valuation multiples by 1-2x.

The 2024 healthcare deal market is experiencing a unique convergence of factors, making an ultimate seller’s market. This includes the following factors touched on in this report:

  • Many more buyers in the healthcare market than sellers
  • Beating election and tax policy uncertainty
  • Locking in tax benefits, as well as the high valuations that come with low interest rates
  • Healthcare is a safe market bet that many acquires desire – especially certain subsectors
  • Smaller deals, larger multiples – More sophisticated acquirers/growth partners are looking at smaller companies and paying more for them
  • Deal structuring has changed to benefit sellers – Growth partner approach takes risk off seller’s shoulders
  • Partnership approach to acquisition instead of buy, cut costs, and sell
  • More buyers with more cash than ever before
  • Post-covid technology upgrades across the whole industry have made it more lucrative to growth buyers like private equities (PEs). They understand how to integrate tech and business within medicine.

The extreme market imbalance benefiting sellers right now has led to high valuations and a multitude of buyers vying for opportunities. Sellers can leverage this environment to their advantage, locking in tax benefits and favorable valuations before the potential slowdown and tax considerations post-2024. A perfect market brew such as this should be hard for sellers considering a sale to ignore, especially surrounding healthcare M&A.

What’s in the Report – Jump to Links:

The coming year and beyond will be impacted greatly by impending macroeconomic and political situations coming to a head. Here are some considerations to keep in mind as well as how they could impact 2024 deals.

Election Year Dynamics and Tax Law Considerations

The economy remains susceptible to substantial shifts driven by various factors, including the US election, tax policy, interest rates, and international politics. By proactively assessing and addressing potential tax and regulatory changes, businesses can navigate this uncertainty and find the right timing for optimal M&A outcomes.

Regardless of political affiliation, elections often trigger changes in the M&A market landscape. Presently, the tax and political environment for such deals, particularly in healthcare, is highly favorable for sellers. Our projections suggest that while the market may remain relatively stable at best, there’s a possibility of increased capital gains or other tax implications, alongside regulatory adjustments. It doesn’t matter which party wins because political turmoil usually causes a slowdown in the near-term as markets adjust to the new landscape. Many companies eyeing growth partnerships or exits within the next year or two are wisely seeking to enter the market with a buffer period before the election to avoid buyer market uncertainty. At ASA, we’ve bolstered our resources to ensure our current clients secure deals before potential market shifts.

Tax Policy Considerations

The Tax Cuts & Jobs Act brought comprehensive and beneficial reforms for many business owners. However, certain provisions, such as the qualified business income deduction, are set to expire soon. This deduction, allowing small business owners to deduct 20% of their income, could affect profitability and consequently valuations if discontinued. The permanency of these provisions may hinge on the election outcome.

2024 is poised to witness significant tax-related shifts, particularly for business owners. Given the potential changes in tax laws and the retirement of Tax Cuts & Jobs Act provisions, the coming years could see drastic alterations in business taxation. For clients contemplating business sales, we strongly advise consulting with tax advisors to understand the implications and mitigate risks. Entering the market now could preemptively address much of this uncertainty.

Interest Rate Dynamics

Higher interest rates have posed challenges for business owners, with potential implications for borrowing and investment. While indications suggest further rate cuts may occur, uncertainty remains. Business owners must remain vigilant about potential rate fluctuations and their impact on financial planning and investment decisions.

Most of the acquirers offering the highest valuations and most beneficial partnerships for sellers will utilize debt. As interest rate uncertainty increases, the acquirers will lower valuations to mitigate risk. Debt providers are formulaic in their decisions to fund acquisitions at certain valuations. This is why interest rate increases, or foreboding changes, make it more difficult for acquirers and growth partners to close transactions.

However, recently we have seen many transactions close with little to no debt financing. ASA clients that have been leaders in their niche and industry, have acquirers paying without debt. Acquirers see enough of the future value of our clients to rely less on external funding sources. What does this mean for owners? If your healthcare service, technology, or product is superior to larger industry players, acquirers will view you as a platform. Acquirers will accelerate growth with their own funds and both of you will reap the rewards.

Generational Wealth Succession Dynamics

We are currently witnessing the largest transfer of wealth in history as the baby boomer generation, our largest demographic, enters retirement. With this transition comes a significant demand for new ownership within businesses previously helmed by seasoned entrepreneurs.

In response to this demand, a noteworthy trend has emerged among recent MBA graduates. Traditionally destined for roles in prestigious financial institutions like Goldman Sachs or large banks, these graduates are now exploring alternative paths by purchasing businesses via Search Funds. These entrepreneurial ventures involve individuals, often backed by private equity firms or family offices, embarking on a mission to acquire businesses, assume operational leadership, or facilitate new lower-lift roles for the previous owners potentially as board members. More information on this shift from a reputable small business family office owner, Codie Sanchez

This means business owners in the lower middle market now have access to sophisticated capital. These small business owners have never had this access in the past. Most of ASA’s clients know how to grow but need what we call smart capital. This is an acquirer with experience building similar companies, not just deep pockets.

 

Deal Types and Structures Becoming More Beneficial for Sellers

Since buyers increasingly view healthcare deals as a safe investment, the market has been booming, offering sellers a plethora of deals to choose from. Recent trends in deal types and structures have empowered sellers to optimize their outcomes beyond mere valuation.The amount and variety of acquirers today is more than we have ever seen, giving sellers a unique advantage by getting to be picky when finding the right deal partner for their needs, at the right valuation.

Smaller Deals, Higher Multiples

The paradigm of deal-making has shifted significantly, with smaller healthcare companies recently commanding attention and fetching remarkable valuations.

Four years ago, if we tried to sell a company and that company was below $1M in profit, buyers would tell us it’s too small and it wouldn’t collect interest. Today, however, looks very different with high valuations even with lower EBITDA companies. The ASA team actually just successfully closed two healthcare transactions under $1M in profit above a 5x valuation multiple. This is remarkable in our industry. Many sophisticated family offices, private equities and other financial buyers are moving down market and that capital shift is causing higher valuations. These valuations are extending upward, so today a company in the $1M – $5M profit range is fetching far higher multiples than 5x.

The influx of new acquirers, including search funds, independent sponsors, private equities, and family offices, has driven sophisticated buyers down-market to explore opportunities in smaller enterprises. What was once considered too modest in profits now garners comparable interest and valuation multiples at a level larger counterparts would have seen in the past. This accessibility allows business owners to forge partnerships with highly adept financial backers even at profits ranging from $500k to $2M, a scenario previously unheard of.

The landscape of deal structuring has undergone a remarkable transformation, providing sellers with an unprecedented array of options. Unlike the conventional approach of outright acquisition, sellers now have the flexibility to navigate various post-acquisition scenarios.

Twenty years ago, being acquired meant you were transitioned out of the business. Financial buyers would normally purchase a company outright, cut the costs, change over management and sell the company. Now there are many options for owners. Not only can they choose between a larger variety of types of buyers like financial vs. strategic, which can change the terms or types of deals offered, but there is also the opportunity to handpick the role you want for yourself after the sale.

Today, owners can choose to opt for semi-retirement while retaining a board position, collaborate in crafting succession plans, or maintain operational involvement with the support of scaling partners (whether long-term or short-term). More granularly, there are often enough deals on the table to compare between, that owners get the luxury of choosing the growth partner with the greatest strategic advantage, like those who can support more with marketing, sales, acquisitions, infrastructure, or margins. This diversification of options not only empowers sellers but also ensures smoother transitions and sustained growth post-acquisition.

Strategic Partnerships Decrease Seller Risk

While capital availability remains abundant and valuations high in 2024, this means that more buyers are interested in each transaction, giving sellers the unique position to choose the right growth partner. Business owners are increasingly prioritizing more strategic partnerships over mere monetary gains when they have their pick at reasonably high valuations.

It’s not just about securing capital; it’s about leveraging the expertise and network of acquirers to propel sustained growth and innovation. In the healthcare sector, some of these strategic advantages include: industry connections capable of facilitating access to key clientele, experience building infrastructure for scaling, acquisition search and integration of smaller competitors, creating sales and marketing departments, researching new service lines or technology investments, branding expansion, etc.

In essence, the evolving landscape of deal types and structures offers sellers unprecedented opportunities to maximize their returns, forge strategic partnerships, and navigate post-acquisition scenarios with agility and confidence. With this particular trend, we don’t know how long these sophisticated acquirers will continue to look at smaller companies, and could revert back to focusing only on larger companies after 2024, therefore, it seems that now is a particularly ideal time for smaller companies to find the right growth partner.

 

Investor Landscape: Financial & Strategic Acquirers

As financial and strategic acquirers vie for the same opportunities in 2024, sellers must stay abreast of shifting trends and capitalize on patterns to identify which kinds of buyers will make the best offer, both in valuation and partnership.

Financial Buyers

Financial buyers include search funds, independent sponsors, private equities, and family offices. In the past, they were not the biggest players in a competitive deal process. However, today these types of buyers have more funding coming into 2024 than ever before in history.

Private Equity

According to S&P Global, private equity is currently sitting on over $2.6 Trillion waiting to be deployed. Yes, that’s the size of the U.S. GDP.

Previously, it was a long standing view that investing in the overall stock market will get you the best returns. However, there has been a shift. If you look at large endowment funds (think a multi-billion fund like Yale University’s) and pension funds (think Ford Motors Pension), more of their capital is being allocated to private equity because they’ve been seeing higher returns.
Eqvista states “Private equity has often outperformed public equity over the long term, with studies showing that private equity has generated an average annual return of approximately 10-15% over the past few decades, whereas public equities have typically yielded lower returns, averaging around 7-10% during the same period.”

Today, even average citizens can have access to private equity investments. With all this money flooding in, it is making more sophisticated financial buyers go down market to grow smaller businesses. At ASA, we currently receive 200+ outreaches per month from private equity or similar financial buyers looking for businesses to acquire. More than ever before.

Family Offices

Family offices represent a significant force in the realm of company investment. Notable families like the Waltons, whose wealth stems from Walmart, exemplify this trend, actively seeking avenues for higher returns by acquiring safe companies. While family offices may exhibit a somewhat less aggressive approach compared to private equity firms or other financial buyers, they remain discerning investors, willing to offer substantial sums for businesses that align with their unique criteria. One distinguishing feature of family offices is their often longer time horizon, affording acquired companies the opportunity to chart a sustainable growth trajectory without immediate pressure to pursue rapid expansion post-acquisition.

Strategic Buyers (Competitors or Vertical Expansions)

In recent years, strategic buyers in the healthcare space haven’t been as competitive in many of our team’s transactions as used to be the case years ago.

However, strategic buyers can still present some of the highest offers when they perceive very strong synergies with the target company. These synergies may include access to key customers, potential for cross-selling opportunities, margin improvement or targeted geographic expansion. The fact that you will never know exactly which company sees you as the missing key to unlocking their growth is the single most important reason to run a truly competitive sales process. It holds buyers to timelines and market standards and brings in many different offers that you can negotiate against.

Recognizing the detrimental impact of prolonged negotiations, ASA emphasizes the adage, “Time is the killer of all deals.” Stringent timelines and expectations should be enforced to prevent potential buyers from stalling and ultimately abandoning the acquisition process. Despite initial interest from many clients in being acquired by strategic buyers, prolonged timelines and inefficiencies have often led to disillusionment. For instance, one client found themselves stuck in a six-month due diligence process under a Letter of Intent with a strategic buyer, only for the deal to never materialize.

However, even with these standards in place, ASA has recently seen more success with financial buyers, who typically exhibit dedicated capital and streamlined acquisition processes, resulting in shorter timelines and more favorable outcomes for ASA’s clients.

 

What Acquirers Are Looking for in 2024

While we already know acquirers are looking for smaller deals more than ever before, there are additional company qualities these buyers are looking for that make a company particularly lucrative in the market. If your company possesses these qualities, the current market conditions create a golden opportunity for you to have a competitive process with phenomenal partnerships at the highest valuation.

Healthcare is a Safe Investment

In an era marked by economic uncertainty, acquirers are increasingly drawn to safe, recession-proof companies. Swayed by the unpredictable economic climate and the looming specter of potential changes post-election, acquirers now seek refuge in healthcare companies. With higher valuation multiples observed in today’s healthcare deals, especially at lower middle market EBITDAs, healthcare has emerged as a haven for investors seeking stability amidst volatility.

Sub-sectors

Five years ago, most acquirers would reach out to us looking for companies in any broad industry. They really only cared about having healthy companies to acquire.

However, the landscape has shifted significantly since then, with a surge in available capital prompting acquirers to focus on specific niches. This trend is particularly pronounced in healthcare. Our experience indicates that clients operating within niche markets, offering superior services compared to larger competitors but lacking the resources for expansive branding efforts, have commanded some of the highest valuations.

Acquirers are drawn to such niches and are willing to allocate substantial marketing budgets to capitalize on their potential. For our clients, this presents a remarkable opportunity, as it allows us to strategically match them with acquirers who we know will make the best partner for growth and bring what’s missing to the table.

Quality of Revenue

In the landscape of healthcare acquisitions today, the caliber of your revenue stream holds unprecedented significance in determining valuation. But what exactly constitutes “quality of revenue”? Subscription-based revenue models, where customers commit to monthly or annual payments, naturally attract substantial interest from acquirers. This type of revenue adds more money to your valuation than the same revenue of a different type.

Even if your business operates on a project-based revenue model, there are astute acquirers who recognize the value of enduring customer relationships. Consistency and longevity in customer relationships, regardless of revenue model, significantly elevate a company’s appeal to potential acquirers.

In the realm of healthcare acquisitions, the quality of revenue reigns supreme. Subscription-based revenue streams command premium valuations, but even project-based revenue companies can pique acquirer interest if they boast long-term customer relationships.

Metrics Tracking and KPIs

For healthcare companies eyeing acquisition, meticulous metrics tracking is key to readiness and drawing interest from buyers. Tracking customer revenue over time, for instance. Determining the normalized financials (adjusted to what the books would look like if an acquirer took over) is paramount. Understanding the company’s revenue recognition and expense allocation is key since buyers need to study your cycle from sale to cash to payables. Having the ability to forecast credibly enhances a company’s attractiveness to acquirers as well. Stability in customer relationships, along with accurate financial reporting of true cash output, instills confidence in potential buyers.

Technology in Healthcare

In 2024, acquirers are expected to prioritize companies with demonstrated potential for growth and a solid track record within their niche. Businesses boasting resilience against technological obsolescence, often referred to as ‘AI-proof,’ hold particular appeal for acquirers due to their enduring relevance. Moreover, entities positioned at the intersection of healthcare and technology, will likely attract heightened interest from acquirers due to the potential for these to disrupt current healthcare delivery. As the healthcare industry undergoes a technological transformation, companies leading this evolution are poised to be sought after by acquirers and growth partners alike.

 

The Winning Healthcare Sub-Sectors

While the healthcare market as a whole is experiencing significant success, our team has identified a few more promising healthcare market segments that are proving to be particularly lucrative in terms of valuations, volume of submitted offers, and overall deal viability. These sectors include Outsourced/Ancillary Healthcare Services, Value-Based Care & Concierge Medicine, Behavioral Healthcare, and Home Health.

Outsourced/Ancillary Healthcare Services

In the past four years, our team has personally seen a surge in the sale of outsourced healthcare service companies, surpassing all other categories in the healthcare sector. But what exactly constitutes this sub-industry? Put simply, if your business provides any service or technology to healthcare providers, you fall under this umbrella. We’ve facilitated the sale of various entities, including medical billing firms, EMR/EHR service providers, IT companies and consulting firms catering to medical practices or hospital systems, and many more.

As outlined in preceding sections, strategic buyers are no longer necessarily offering the highest bids and often encounter delays in finalizing acquisitions. This has led to increased interest from financial acquirers, many of whom are eager to invest in healthcare but lack physician staffing. The appeal of owning outsourced/ancillary service companies lies in the fact that ownership doesn’t require medical credentials, yet provides exposure to the lucrative healthcare sector.

Furthermore, the healthcare industry has witnessed a technological revolution, particularly accelerated by the Covid-19 pandemic. With the advent of telehealth, telemedicine, and artificial intelligence, healthcare is finally catching up with other industries in terms of automation and tech-enablement. Companies involved in cost-saving initiatives, automation, or tech-enablement for healthcare providers are currently commanding exceptionally high valuations compared to other sub-sectors.

Value-Based Care & Concierge Medicine

The U.S. healthcare system, long broken and criticized for its shortcomings, is finally taking strides toward improving patient outcomes. Despite spending more on healthcare than any other developed nation, the U.S. often lags behind in terms of patient results, sometimes falling below standards seen in third world countries. Historically, the system incentivizes doctors when patients stay sick rather than naturally incentivizing wellness. However, times are changing, with a growing emphasis on value-based care.

As part of this shift, concierge medicine is changing the primary care model. The focus is more on preventative care rather than symptomatic. This model is a particularly lucrative investment for many buyers because of the unique opportunity to improve the well known low profits of the primary care area as well as seeing the ability to harness the recurring revenue of these types of business models. ASA has had clients in which the average patient stayed within the concierge medicine network for 7.5 years. Acquirers are willing to pay very high valuations for this type of recurring revenue.

As the healthcare landscape shifts towards value-based care, our focus is on identifying the right partners to help scale and grow these concierge medicine and other companies at the forefront of value-based care implementation. With a current client engaged in concierge medicine, we are witnessing remarkable outcomes in terms of both valuations and collaborative partnerships, underscoring the promising potential of this sector.

Behavioral Healthcare

Behavioral healthcare has been gaining more attention in recent years. Unfortunately, the pandemic shed light on many issues our population faces, from addiction to various disorders. Even conditions like Autism, unrelated to the pandemic, have seen a rise in the past 5-10 years.

The interest in acquiring behavioral healthcare companies is growing. Factors contributing to this interest include newer methods of therapy delivery, such as telehealth. Telehealth allows companies to reach individuals across the country, expanding their service reach outside of previous boundaries. Moreover, many companies are moving away from traditional office spaces, opting for more cost-effective solutions. It’s easy to see why acquirers find this appealing—increased revenue with reduced expenses like office rent. With a growing market need, cost-effective solutions, and improved client satisfaction, it’s a win-win situation.

Furthermore, corporations are prioritizing positive mental health for their employees by providing on-demand access to mental health solutions, especially through the telehealth channel.

Home Health

Home health services have absolutely blown up in popularity, particularly in the wake of the pandemic. This industry, once regarded as promising but in need of a catalyst, has now become a focal point of interest. Notably, the ASA team recently oversaw the sale of a home healthcare company at a valuation surpassing even that of some healthcare technology firms the team has worked with. The momentum behind home healthcare is undeniable, with acquirers actively seeking out robust companies in this sector.

Any company involved in delivering healthcare services or equipment to the home has become a prime target for acquisition. One key driver of this heightened interest is scalability. Unlike traditional healthcare models confined to specific locations, the appeal lies in the potential for exponential growth offered by scalable businesses with no geographical constraints.

 

Conclusion: Is 2024 the right time to sell?

With the impending uncertainty of the upcoming election and potential tax changes, coupled with the government’s scrutiny of financial buyer ownership in certain healthcare sectors, many sellers are taking their “chips off the table” while the tax code is still favorable. Moreover, the market dynamics favor sellers, with a surge in demand for small, lower middle market healthcare businesses and a scarcity of sellers. This is causing multiple turns of valuations higher than most other sectors. Healthcare companies become safe acquisitions in times of turbulent economics.

With more access to potential partners than ever before, the options of capital available to you are numerous. You can semi-retire, you can hand off the day-to-day headaches or you can transition out fully over numerous years. Acquirers out there today can help create an ideal exit for you. Going through a company sale and continuing with your company afterwards creates a mental shift. You now have a nest egg that you could retire with but instead you continue to help your company grow. You make better decisions and have less stress when that retirement fund is there.

Further, the other upside for owners in this current landscape is the “second bite of the apple”. After you sell a majority interest in your company, you stay involved for another couple years, and the value of your retained equity should increase. For example, if you sold 70% of your company today, and stayed involved for 3 years, then fully exited, the business should have grown faster with your new growth partner. Your retained 30% should have a much higher value than it does today. A case study of one of our clients had their revenue triple in less than 2 years after selling a majority interest.

Overall, getting into the market earlier in 2024 has been the prerogative of our clients. We have already successfully closed 2 transactions this year with two more on the way. If you have wondered whether now is the time, we spend a ton of time with potential clients informing them about what we are seeing in the M&A world. And this year is shaping up to be a record year for us in terms of closings. I would say it is a good time to begin understanding your options as a healthcare business owner.

If you’re looking for the support often required to go to market and run a truly competitive transaction process from start to finish without the added stress of going through a transaction, the ASA team is poised to help! Schedule a quick call with one of our team members to determine if we’re both a good fit for each other or to ask questions.

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