Earlier this year, we launched this new section of our blog, meant to let subscribers know what businesses our network is selling and what businesses we have buyers for. It will appear here at the top of each post. If interested in buying or selling, let us know. Feel free to forward the information to anyone you think might like to see it.
LOOKING FOR: Online (non-retail) Businesses. B2B (I.e., SaaS, agencies, marketplaces and YouTube channels). Adjusted net U.S.$300,000 to $2 million Revenue: Location: Worldwide in**@Wo**********************.com
10 June 2024: Selling a Business: Regulators Shifting Buyer Focus
Over the past couple of years, we’ve posted often about demand for businesses created by strategic buyers expanding through acquisition using a “roll-up” strategy and private equity firms using a similar strategy of buying up a large number of small but similar businesses to create a large entity that they will ultimately sell to a larger investment firm.
We’ve also written about the industries largely been targeted by such acquirers: plumbing, electrical and HVAC contractors have been popular targets for the past few years. Landscape contractors, as well.
The businesses in those fields that generate the strongest interest are those that derive their revenue in large part through contracts that provide recurring revenue.
For example, a landscape contractor that has contracted with local governments, commercial landlords, hospitals, banking institutions and the like, are of great interest to institutional buyers. But there are other industries that such buyers have been quite keen on and two that come immediately to mind are tech companies – particularly MSPs – and healthcare. It’s what’s happening to the latter on a regulatory front that concerns us.
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The calendar of events scheduled for this month in The Brokers Roundtable℠ is posted – somewhat belatedly – in the Announcements space. Don’t miss Office Hours (“Ask Me Anything”), workshops, Live Streams, Thursday Specials and more.
REALTORS: The Announcements space also has news you can use!
If you’re not yet a Member of The Brokers Roundtable℠, you can find out what other benefits Members enjoy – and join us – here.
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In the news a week or so ago was a story about how the U.S. Federal Trade Commission (FTC) has begun an investigation of private equity firms acquiring small medical practices. News of this development, of course, has resulted in private equity firms pulling back from this market. And the natural result of that is downward pressure on values (a result easily envisioned by anyone in possession of a three-digit IQ).
Because roll-ups are a big part of our industry and healthcare has been an oft-discussed target in our field, Alerting you worthies to this development was deemed a priority. Herewith is a summary of the article. (The full Wall Street Journal article can be found here.)
Private-equity firms are experiencing a notable decrease in their acquisitions of smaller medical businesses, termed healthcare roll-ups, primarily due to heightened scrutiny from U.S. antitrust regulators. According to PitchBook Data, there have been only 23% of last year’s healthcare roll-up deals as of May 28 this year. The Biden administration has actively sought to curtail these roll-ups, citing concerns about reduced competition, higher medical costs, and lower quality of care. The Federal Trade Commission (FTC) and the Justice Department launched a formal inquiry on May 23 to identify harmful effects of roll-ups on the U.S. economy and have taken further steps to curtail these deals.
Tim Cornell, an antitrust partner at Debevoise & Plimpton, notes that regulatory scrutiny has made healthcare roll-up deals more expensive and slower to finalize, but hasn’t necessarily made them impossible. Roll-ups, where a firm combines smaller companies to create a larger entity, have been a cornerstone strategy in the private-equity playbook. However, the FTC, under the leadership of Lina Khan, has grown concerned about the cumulative impact of these acquisitions on competition, even when individual deals involve small businesses.
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Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. Instead of enrolling in the complete course, could you enroll only in the module(s) you wanted? We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
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The FTC’s scrutiny has intensified, with notable cases such as the lawsuit against private-equity firm Welsh, Carson, Anderson, & Stowe and an anesthesiology business for allegedly trying to monopolize the Texas market and raise prices. The regulatory landscape has also shifted, with changes in merger guidelines to allow for more scrutiny of small roll-up transactions. Despite push-back from the private-equity industry, regulatory efforts continue, prompting concerns about their potential impact on entrepreneurship and job creation.
Despite these regulatory pressures, some argue that the decline in deal volume is primarily due to macroeconomic factors such as high interest rates, rather than government scrutiny. Nathan Ray from West Monroe believes that regulatory pressure has had little effect on deal consummation, stating that while private-equity firms are investing more in market analysis, they haven’t failed to close healthcare transactions due to scrutiny.
Britton Costa from Fitch Ratings suggests that the government crackdown on healthcare roll-ups could have short-term benefits for credit quality by moderating firms’ use of debt. However, he doesn’t foresee a dramatic slowdown in healthcare roll-ups unless regulators start winning more court challenges to mergers. The mixed record of the FTC in these cases leaves some in the industry uncertain about the future impact of regulatory actions.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Overall, despite setbacks in court challenges, the FTC’s actions have significantly influenced the market, leading to a notable slowdown in healthcare roll-ups. Some industry insiders fear that continued regulatory pressure could turn the healthcare roll-up strategy into a “no-fly zone” for buyout firms, significantly impacting deal activity in the sector.
There has been a great deal of activity in the healthcare M&A market in the U.S. lately. This has been particularly true with regard to dental practices. (The trend to roll up dental practices extends to Canada, as well. One of the Toronto-based Members of The Brokers Roundtable℠ is working with two such buying groups. Fortunately, though our Canadian neighbors have their own growth-stifling regulatory environment, the dental industry is not yet impacted by FTC-type regulation.
The Bottom Line
The most easily discerned impact of this new federal scrutiny is, of course, reduced demand and what naturally follows reduced demand – for lumber, houses, vehicles, Big Macs or tomatoes – is generally reduced prices. Fewer buyers usually translates into lower values.
Roll-ups of healthcare businesses by private equity are not the only businesses being effected; other business sectors are also being impacted. But the healthcare sector appears to be in the regulators’ crosshairs
That said, we have to see how this plays out over the next six to 12 months, especially given that there’s an election coming up this year. If the current team is re-elected, this situation might get worse. If the challenger wins … well, there’s no telling what could happen. In the meantime, one of Ronald Reagan’s more famous quotes can be applied here. To wit: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
Searching For…
NOTE TO READERS: Our “Searching For…” feature has been moved to our online community, The Brokers Roundtable℠. It will appear there exclusively from now on.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@Wo*******************.com