Opportunities for Action: How to Factor an Acquirer's Stage of Financing Into Your Thinking
Paul breaks down his interview with Larry Benz into three actions: weigh deal structure over an acquirer's private equity round, treat culture as key, and look past geography when judging fit.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good afternoon and welcome to another episode of the Martin Rehab M&A advisory. Today we're going to take a look back two weeks ago at an interview that we did with Larry Benz, the CEO of Confluent Health. And what we're going to do is we're going to dissect this interview and pull out of it. What are three things that you can put into action today in your company that will best prepare you for that future eventual potential acquisition someday? So, what are the three biggest takeaways from Larry's interview?
Well, first is that the floor number when you come into a an acquirer at what level you come in, at what level that private equity group is not nearly as important as the deal structure aligning with what you want to accomplish. So when you come in whether it's a first round, a second round or a third round private equity group is not as important as the aligning with what you want to accomplish. Second is that culture is key whether it's round one, round two or round three.
Keeping in mind that change is inevitable in just about any one of the in every one of these change is inevitable. And then third is that geography can be a bit misleading as it pertains to who and what companies you think could be the best fit for your company. So let's jump in. Let's start by talking about the floor number or simply what stage do you enter into as a partner into one of these large companies. And again, what's most important is that whatever stage their private equity stage is, what's most important is that they're going to be able to support to achieve you and your company's goals.
And Larry made something very clear, and I want to make this clear as well, is that, you know, round one private equity group companies versus ground two and ground three, these are not multilevel marketing schemes. So, while it may be beneficial to get in at round one, it may be just as beneficial or more beneficial to get in at round two. There's no significant benefit from getting in on the ground floor versus getting in at midstage. And that is really important and something that as you look to potentially go into the market, don't discard companies who may be in round two or round three of their private equity or don't discard those in round one.
And the most important thing as it comes to and as it relates to the floor number as I as I'm describing this today is some key boxes that need to get checked. First, how do you get in and how do you get out of your equity? If you sell your company and you roll an equity position, what's the value of that equity when you get in? How do you get that out? And how does it valued when you get that out? Key, how much control do you have?
Meaning, is that equity simply up in the parent company where you have no control or is it a in a local LLC controlled by the acquirer, but you still have equity in that local LLC and do have some control. So, that's another box to check is how much control do you have on the growth of that equity? And for the acquirer, is there a history of successful equity growth? Meaning, have sellers come in, taken their equity, grown that equity, and gotten out? What's their history of that route?
And then finally, is the valuation of your equity coming in and going out? Is it crystal clear right from the start? And this is where these deals can get extremely complicated. And what we find is less not more complicated seems to always be better. If it cannot be made crystal clear for you should really think twice before entering into that agreement. You want to make sure that is crystal clear. Our analysts, our acquisition team, they dissect your equity so you are 100% secure on your value today and how you increase that value in the future and how you get out.
Really important. All right, let's talk now a little bit about culture. Culture is absolutely key. Larry described culture as how people act. I thought that was really good, you know, and I agree with that. In fact, you know, with how people act, I would give this question. How people act when there is a major challenge presented or there's a major setback or a mistake has been made on the other side. How do your people react? I think that's a key with culture. How do they react?
How do people in your company react when they disagree? So, if the acquirer disagrees with something that you're doing, how are your people and folks going to react? These are all learned behaviors. And I guarantee you the better your culture is, the better fit you will find with the cultures of the larger companies and the better you and your company and your people will fare going into a relationship and into a partnership with a larger company. This is not predicated on big or small. Many of the big companies in their second and third round of private equity have really good cultures as well as do the smaller ones.
I've seen great and bad cultures from both big and small acquirers. And communication skills we have seen over and over again are paramount to paramount to great culture. So if you're preparing for a future exit for a partnership, get those communication skills in your companies as good as you can get them. Get them to high levels of performance. You will fare better when you get into and into a partnership. And finally, take the time to find the best match. Make it a great match. Find the great match out there.
I'm going to tell you today, there's no perfect match. And the more prepared your company is making a very positive culture, folks that are ready and willing to accept change, you are going to fare better as you go into the market without question. Let's talk about the last point. This is interesting. Geography is overrated. You know, it's really important, okay? But what is most important is what they need, what the acquirers need. Generally, smaller acquirers will stay more locally focused and they will move in contiguous states whereas large acquirers will look to leapfrog.
Now, size is a factor. No question. Larger companies, marquee companies, tend to be more focused on by acquirers than smaller locally focused companies. Okay, both companies are great. We're just talking about size. So, what is so important is you need to have a good understanding of what the future plans are of the acquirers in your state. If you don't know what those future plans are, you don't know how you can be that fit. And growth is a great asset to have more opportunities. Whether they are larger acquirers that are leaprogging into your state or they are smaller acquirers looking to come into contiguous states, you will have increased opportunities if you are showing that you are a growth company.
We have seen companies go into new states with three clinic companies using them as the growth asset in order to grow as they would for a 10 or 12 clinic company. And then last is how well do you know your geography? And this is something I would say today you can investigate in and really be able to have a conversation about who's the local competition. What are they up to? What are the hospitals up to? How many clinics have hospitals and MD groups opened in the past?
What are some of the tendencies of the physician groups in and around your market? And what are some of the key demographics? Are there some new big companies coming into your market? Not physical therapy companies, meaning other companies that could be, you know, real solid workers comp opportunities. Knowing those demographics, learning those demographics, and being able to have that conversation with acquirers will put you a step ahead of your competition because in this current market, there is competition for the best companies out there. So, if you are right now in a stage where you're starting to think that maybe this is something you want to do or it's something you want to do in the very near future, click below, give me a call.
Let's talk about how you can on these three really important points how you can get started today. Thanks. I look forward to talking to you in the very near future.
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