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Healthcare M&A Experts Urge Getting a Head-Start on QofE Work

Panelists at ACG South Florida’s Healthcare M&A Panel in February discussed preparing companies for a sale, EBITDA addbacks and sector trends.

Healthcare M&A Experts Urge Getting a Head-Start on QofE Work

Panelists at ACG South Florida’s 16th Annual Healthcare M&A Panel Discussion on Feb. 28 said the process for selling and assessing healthcare companies is changing.

Many companies are doing quality of earnings (QofE) work on the sell-side ahead of an auction, and buyers are becoming more circumspect about EBITDA addbacks. Platform acquisition activity is expected to pick up in the second half of the year and valuations for quality companies have remained high.

Here are some of the key takeaways from the panel:

QofE work is shifting to the sell-side. “A couple of years ago, it was about 70% on the buy-side and 30% on the sell-side. Now it’s going to flip to where we’re doing about 70% sell-side work,” said Ian Goldberger, principal on the Business Consulting Team at accounting and advisory firm Kaufman Rossin.

ACG Event Recap

WHAT: ACG South Florida’s 16th Annual Healthcare M&A Panel Discussion

WHERE: Tower Club, Fort Lauderdale

WHEN: Feb. 28, 2024

THE TAKEAWAY: Companies preparing for a sale should do sell-side quality of earnings work before going to market and be judicious about incorporating EBITDA addbacks.

Bill Britton, managing director and co-founder at investment bank Cross Keys Capital, said he recommends his clients do sell-side QofE work. “We’re really pushing almost all of our clients to spend the money up front and get the quality of earnings done, such that when we are going to market, we can show the buyers much better packages as to what this business actually is,” he said. “It’s probably going to save a month or two on a deal and it just instills in the buyers a much higher level of confidence.”

Buyers are becoming more cautious around EBITDA addbacks. Companies giving themselves credit for potential future revenue via EBITDA “addbacks” while going through a sale process should be careful, as buyers are becoming much more judicious about these metrics. When discussing tolerance thresholds for addbacks, Britton said: “If it was any number above 25%, I’d throw a flag down, scrutinize and drill down. Now it’s more like 15%.”

Jeffrey Schillinger, CEO at DermCare Management, said healthcare companies often try to give themselves credit for new doctors that they plan to hire or practices they plan to open. “They say, ‘we’re going to add a doctor here.’ Well who? ‘We don’t know yet,’” he describes a conversation with a prospective seller. “It’s like, can we get addbacks for yet unborn physicians who will one day become a dermatologist? That’s my favorite one,” he joked.

Legitimate addbacks, though, are ones where already hired new physicians have a path to ramp and can show the revenue they’ll bring in in future years, speakers said.

Private equity moves in herds. Financial sponsors are the biggest buyers of healthcare companies right now. According to Cross Keys research, private equity outpaced strategics, health systems and other buyers by 43% in 2023. PE tends to follow the same trends. “These deals absolutely go in cycles and the private equity world does go in a herd mentality,” said Britton. “If you look back 10-15 years, during that time, we did 30-40 anesthesiology deals. In the past five years, maybe we’ve done one. In the past 3-5 years, we’ve probably done 35 eyecare deals but they’re starting to slow down a little bit.”

Schillinger echoed that sentiment. At the McDermott and EY forum within the JPMorgan healthcare conference this year, “there wasn’t a PE firm in the room that wasn’t talking about med spas and cosmetics, which I thought was really interesting,” Schillinger said. “They’re moving in a path.”

Oncology Could See a Pickup in Activity. The most active sectors in healthcare M&A were eyecare, internal medicine and orthopedic practices last year, according to Cross Keys research. Oncology saw the lowest amount of deals but that could soon change, Britton said. “We’ve done three or four oncology deals in the past year or so and that space is just taking off right now.” Britton added that PE buyers and hospital systems are motivated by bonds that have been set up to launch oncology divisions or wealthy people donating money to set up oncology practices within existing healthcare systems. “It’s the perfect storm for those kinds of deals right now,” Britton added.

There is momentum for a pickup in deals. While add-on activity is strong, platform acquisitions have been lighter, but speakers said that’s expected to soon improve. “There could be a nice pickup in the second half of this year driven by that dynamic where private equity firms are going to have to sell their portfolio companies in order to raise new capital because there is a new focus from LPs on liquidity,” said Miller Norman, principal at lower middle-market private equity firm Blue Sea Capital.

Valuations for quality platform businesses have largely remained the same, while leverage has come down a turn or two from 5x-6x 18 months ago, Norman said. This has led buyers to use earnouts, seller notes and preferred equity to close deals. “In the broader deal environment, where there are fewer deals, more eyeballs are chasing quality companies, which has kept valuations up,” he added.

The healthcare sector has enjoyed robust activity in the past 10-15 years, though some think it’s slowing down, said Britton—though, he disagrees. “I don’t think it’s going to slow,” he said. “One of the beautiful things about healthcare is there is always going to be chaos and change and where there is chaos and change, there is opportunity for creative people.”


Anastasia Donde is Middle Market Growth’s senior editor.



Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.