Choosing a Buyer: Private Equity vs. Search Fund vs. Strategic

Once you’ve decided to sell your healthcare company, one of the biggest decisions you may need to make is which type of buyer you will choose. If your company attracts a variety of buyers, you’re likely to have a choice between private equity (i.e., financial buyer), search fund, and/or strategic buyer. All generally have the same goals in mind, but approach deals in different ways. 

As M+A advisors, we at VERTESS are always being asked about the differences between these types of buyers. When selling your healthcare company, it’s always a good idea to first determine your exit strategy. For example, are you wanting to just stay on during a transitional period and then hand the keys over to your business? Maintain rollover equity and actively continue to run the company? Answering these and related post-sale questions will help you better understand which type of buyer will best meet your needs in a transaction. 

Our main goals as M+A advisors are to make sure we get a deal across the finish line and achieve the best valuation possible while also ensuring the buyer is one our clients approve of. Transactions are much more than how much cash there is at close. Most transactions we are involved with see a seller net far more by having a mix of rollover equity, seller back financing, consulting agreement, and earnouts — opportunities that can vary based upon the type of buyer. 

With these objectives in mind, let’s gain a better understanding of each of the three predominant buyer types you are likely to encounter when it’s time to sell your healthcare business.

Private Equity

Also known as a funded or financial buyer, a private equity buyer will almost always keep the acquired company’s current executive team in place. Private equity transactions tend to include rollover equity and seller back financing. Private equity groups (PEGs) will typically acquire and manage the business for 5-7 years and then sell the company for a profit. 

PEGs usually look for more mature businesses rather than startups. These buyers usually already have healthcare companies in their portfolio and may have companies related to/in subsectors of the companies they are looking to acquire. Furthermore, there are quite a few PEGs focused solely on healthcare. 

A few additional key points to know about PEG buyers: Most will lack extensive expertise in your company’s area of focus. PEGs expect a certain return on their investment. They may use debt to finance the deal. They will also spend significant amounts of time scrutinizing prospective acquisitions, including financials, budgets, bank statements, audits, and much more. 

Search Fund

Also known as unfunded sponsors, search funds, unlike PEGs and strategic buyers, want to not only own but operate the businesses they acquire. A company’s current CEO will no longer be managing or running their business post-acquisition. In a search fund transaction, there is typically a short transition period that includes some compensation for the seller. 

Search fund deals tend to be on the smaller side — too small for most PEGs to consider. Search funds are generally looking for businesses that have been profitable for at least five years and are growing. The upside of selling to a search fund is these investors or investment team tend to have vast knowledge and experience in a seller’s space. Search funds look for companies with good potential for growth and healthy balance sheets. Search funds put investors’ money to work, with active investors offering greater value to the business. 

A key point to know about search funds: They generally do not have the growth capital readily available at the time they make an offer for a company. Search funds typically work in these stages:

  1. Search for a company
  2. Make an offer to a company
  3. Secure the funding needed to make the acquisition
  4. Acquire the company
  5. Operate the company

When a search fund submits a letter of intent (LOI), it usually needs to secure funding during due diligence, mostly from private investors/and/or groups. Thus, transactions involving search funds are less successful than with other types of buyers that come to the table already with the adequate funding needed to complete a transaction. 

Unlike PEGs, there is no turnaround timeline following a search fund’s acquisition. Search funds tend to hold on to assets much longer. 

Strategic Buyers

These are typically what we call non-financial or “buy-and-build” buyers. Strategic buyers already operate in an adjacent market of a company they’re considering buying. They tend to look for more well-established businesses rather than startups. They look predominantly at products and services rather than a company’s financials and seek counterparts in other regions and better distribution channels. Strategic buyers want to boost their operations and add talent while achieving cost savings and synergies with existing assets. They look for economies of scale, with a mindset that two companies when combined will be of greater value than the sum of their parts.

Strategic buyers tend to pay a premium for companies they acquire because they net a greater value. Following a transaction, an acquired company can expect growing pains and loss of staff, possibly including leadership and particularly when there are overlapping (i.e., redundant) services. Strategic buyers always have their sights set on reselling companies in their portfolio at a higher value. 

Private Equity vs. Search Fund vs. Strategic: What Buyer Is Right for You?

In many healthcare M+A transactions, choosing the right type of buyer takes a fair amount of work. Working with an M+A advisor to determine your preferred exit strategy and optimal buyer type before listing the business is a great step to take and one that should greatly help get a deal across the finishing line. 

If you run a good company, finding a buyer is usually the easy part. Properly navigating the subsequent processes is crucial to achieving a successful outcome. Getting the deal closed requires much more time, effort, and expertise. At VERTESS, we have extensive experience working with all buyer types. We support our clients throughout the entire M+A process, including analyzing each prospective buyer and every LOI submitted. Even after you’ve chosen a buyer, our work doesn’t end. Our team continues working with you and your new partner to help ensure a smooth transition and strong post-transaction collaboration. 

Reach out if you would like to learn more about how VERTESS has helped companies just like yours achieve a successful sale.