In an acquisition of a healthcare company, the buyer has a host of issues to monitor and track during due diligence, negotiation and documentation of the transaction. The lender will be working through the same issues but will often have a slightly different focus that a buyer should understand.
What is your lender concerned about?
1. Do you understand the regulatory risks? It is critical that the lender is comfortable that the buyer understands and is prepared to deal with regulatory issues in the transaction. Nothing will give your lender pause like regulatory issues that are surfaced by the lender.
2. Are there issues in control over collateral? Healthcare companies often have structures dictated by regulatory necessity. For example, in many states, the corporate practice of medicine regulations requires that physician practice management businesses be owned by a licensed physician. The operative company in this type of business often has only a management agreement with a clinic or physician practice group. From the bank’s perspective, their borrower may not own the hard collateral. A buyer should be prepared to address these issues before the bank starts asking questions.
3. Is state regulatory risk spread over multiple jurisdictions? Many healthcare companies have state-specific regulatory risk. Much like when customer concentration raises the risk of something going materially wrong in the business, a business operating in only one or two states has increased concentrated state regulatory risk.
4. Does the business have strong relationships (and contracts) with referring physicians? While the structure may not give a lender collateral in these relationships, the lender often views these relationships as the most relevant business assets. Good relationships — and enforceable non-competes where appropriate — go a long way toward assuring the lender that these relationships will continue.
Buyers need to understand their lender’s concerns and be prepared to address issues before they arise.