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Healthcare and Private Equity in a Financial Downturn: Best Practices to Effectuate a Successful Change in Ownership in Distressed Situations

Posted in Healthcare Services Investing

We were pleased to have terrific attendance at our 17th annual Healthcare Private Equity & Finance Conference held February 19-20. The deep-dive discussions into various sectors, and on the industry and deal-making generally, were extensive and produced interesting discussion. Over the course of the next few weeks, we will be publishing a series of posts coordinated by our colleagues Greg Hawver and Melissa Szabad with key takeaways from various conference panels. The first in our series of posts discuss best practices to effectuate a successful change in ownership including distressed situations. It is authored by our colleagues Zoe Simon and Kenneth Noble.

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Healthcare and Private Equity in a Financial Downturn: Best Practices to Effectuate a Successful Change in Ownership in Distressed Situations

By Zoe Simon and Kenneth Noble

Successfully effectuating a change in ownership (including when the target is in financial distress) can be a critical step in a healthcare private equity transaction during a financial downturn. A panel of experts met to discuss their perspectives on best practices at the 17th Annual Healthcare and Life Sciences Private Equity and Finance Conference, held in Chicago on February 19-20, 2020. In light of the COVID-19 led financial downturn, these topics are particularly timely.

Experts included Amy Heller, Executive Vice President of Healthcare Lending at Congressional Bank; David Campbell, Managing Director at Getzler Henrich & Associates LLC; Andrew Turnbull, Managing Director at Houlihan Locky; and Brian Swett, Partner at McGuireWoods, LLP. Kenneth Noble, a restructuring partner in the New York office of McGuireWoods LLP, moderated the panel.

Here are five key takeaways from the panel discussion.

1. Understand the mission. The transacting parties should understand the mission, operations, and value proposition of the business undergoing the change of ownership. If the parties understand the mission, they will be committed to preserving those critical components throughout the transaction. In a distressed scenario, if the core values, core personnel and/or strategic advantage will not remain intact through such process, then parties should consider whether a transaction is viable.

2. Clarity is key. Parties will typically enter into a term sheet setting forth the high-level “business deal” with respect to a transaction. Successful transactions, however, require a further level of clarity in multiple dimensions of the deal, including the roles and legal duties of the parties involved, the quality of the due diligence performed, and the buyer’s ability to perform. Parties should discuss these rules of the road at the outset of the deal to increase efficiency and speed to close, to the extent not addressed in term sheet.

3. Be prepared. Transacting parties that are unprepared to meet notice requirements, to receive unsavory financial discoveries, or to process information indicating fraud or malpractice are likely to disrupt the business itself or delay the process. Parties and their advisors need to have a game plan for these types of negative developments and need to be flexible in making real time, significant changes to the game plan as developments arise – especially in distressed situations.

4. Know your counterparties. When transacting with younger or less experienced parties, it is critical to get to know the other side, make sure their plans are sound, and verify that no fraud or systems issues will stymie the transaction. While more “hand holding” and diligence may be required at the outset, oftentimes these are the opportunities in which private equity sponsors can add the most value.

5. Replacing power players may be necessary. In any situation where the board or other powerful entity members will be replaced, bringing the new people up to speed with the situation is essential to prevent a reduction in the quality of care. This may require much direct communication between incoming and outgoing entity members.

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