Key Considerations in Healthcare Technology M&A

To date in 2025, we have seen strong activity across the healthcare technology sector, driven by converging forces—including a strategic pivot by some healthcare investors away from traditional healthcare services and toward innovative tech investments and AI.

For PE and family office professionals, these trends highlight the potential opportunities for healthcare technology companies that have the ability to scale quickly and deliver outstanding returns.

As buyers and sellers navigate this landscape, understanding sector-specific issues is crucial to maximizing value and minimizing post-closing surprises.

The Role of Technology Diligence

In healthcare technology transactions, buyers frequently engage third-party experts to conduct comprehensive technology due diligence, evaluating everything from code quality and IP ownership to scalability and cybersecurity vulnerabilities. This process identifies risks like outdated infrastructure or open-source dependencies that could pose legal liabilities post-closing.

For PE and family office buyers, it also helps to align strategic plans with growth roadmaps, resource challenges, and strategic initiatives, especially in AI-driven tools where integration and scalability challenges are common.

Sellers may benefit from sell-side audits prior to going to market to identify issues that may be addressed proactively, potentially boosting valuation. In extreme cases, this may prevent buyers from souring on the target due to outdated technology that could be updated prior to going to market, especially considering the AI tools today that can modernize and migrate aging infrastructure quickly.

If considering hiring a third party for technology diligence, focus on scope and expertise and define clear objectives. Consider selecting a firm with not only experience on code quality and data integrity, but that can uncover synergies and hidden value, identify security weaknesses, and help to establish intellectual property (IP) ownership and valuation. If you don’t know where to start, consider reaching out to a firm that has significant experience in the PE industry and can help identify service providers with relevant expertise at no cost to their clients.

Navigating Complex Cap Tables: Early Legal Involvement Is Key

Cap tables, especially in venture capital-financed healthcare tech companies, can become exceedingly complex due to multiple funding rounds, employee equity incentive plans, convertible securities, and large investor bases. These factors can require complex legal and financial analysis and, in some cases, lead to a lack of clarity regarding ownership and funds flow at closing. Common issues include outdated records, poor equity plan administration, or errors in share allocations.

For PE and family office buyers, cap table discrepancies and complexities may obscure true economics and require significant diligence, potentially creating significant delay and even putting a deal at risk. Sellers should consider engaging an experienced corporate/M&A attorney well in advance to audit and clean up the cap table—verifying compliance with securities laws, resolving discrepancies, and preparing/updating necessary corporate approvals.

Tax Issues and Opportunities

Section 1202 of the Internal Revenue Code, which provides for partial or full exclusion of gain from a sale of “qualified small business stock” (QSBS), can be an important factor in transaction structuring and negotiations for both potential sellers and buyers.

Structuring an acquisition vehicle as a C corporation at inception (or incorporating an existing partnership three-to-five years prior to sale) and ensuring it satisfies all of the nuanced QSBS eligibility requirements under Section 1202 (which should be carefully reviewed with qualified tax advisors)—including, for example, the active business requirement and $50 million gross assets test (increased to $75 million under the One Big Beautiful Bill Act [OBBBA] for QSBS issued after July 4, 2025)—could allow for an exclusion of up to 100% from a taxpayer’s gain on the sale or exchange of QSBS, capped at the greater of $10 million (increased to $15 million under the OBBBA for QSBS issued after July 4, 2025) or 10 times their adjusted basis in the QSBS.

Importantly, the OBBBA introduced a tiered gain exclusion regime for QSBS issued after July 4, 2025, and held for less than five years. Under these new rules, the sale of QSBS issued after July 4, 2025, that is held for at least three years may be eligible for 50% of the gain exclusion otherwise provided for under Section 1202, and if such QSBS is held for at least four years, such sale may be eligible for 75% of the gain exclusion otherwise provided for under Section 1202.

QSBS structuring often is particularly appealing in the healthcare technology sector. In particular, Section 1202 generally excludes from QSBS eligibility entities engaged in the business of health—such as hospitals, physicians, and other healthcare service providers—but generally allows entities engaged in healthcare-related technology businesses to qualify for QSBS eligibility.

PE and family office buyers should carefully evaluate how deal structure impacts potential QSBS benefits, both in a current transaction and in potential future liquidity events. For instance, stock sales generally preserve the gain exclusion under Section 1202, while asset sales and certain merger structures may disqualify sellers from claiming the gain exclusion under Section 1202 unless carefully structured to preserve the target entity’s QSBS status.

HIPAA Compliance Challenges When Patient Information Is Involved

If the target company handles protected health information (PHI), data privacy and security, and specifically HIPAA compliance, become a cornerstone of the transaction—and a potential dealbreaker if overlooked. Buyers must prioritize due diligence to assess the seller’s data security practices, breach history, and business associate agreements, as non-compliance can result in significant fines from the Office for Civil Rights (OCR) and liability to other state and federal agencies.

Integration of IT systems post-acquisition often exacerbates risks, such as mismatched security protocols that could lead to unauthorized PHI access or the spreading of vulnerabilities that cannot easily be mitigated. Additionally, the announcement of healthcare technology transactions can attract the attention of malicious actors who may anticipate potential vulnerabilities during the integration phase.

Sellers should proactively conduct internal audits and staff training to demonstrate compliance, as HIPAA violations can erode trust and reduce valuation. To avoid these issues, engage HIPAA experts early to map data flows and ensure seamless post-transaction compliance. For a cost-effective way to evaluate compliance, please consider checking out HIPAA Architect for Due Diligence.

The Importance of Quality of Earnings Reviews

Many PE buyers mandate a Quality of Earnings (QoE) review to scrutinize the target’s financial performance, ensuring reported earnings or recurring revenue amounts are sustainable and free from anomalies like one-time revenues or aggressive accounting.  This analysis assesses revenue recognition, expense normalization, and working capital trends, providing a reliable basis for valuation and forecasting. QoE is particularly valuable in the context of healthcare technology targets that have a subscription model and may be valued based on a multiple of recurring revenue but have unsophisticated accounting systems in place that may overstate recurring revenue and minimize the impact non-recurring revenue (i.e., one-time implementation fees, customization charges, etc.)

Sellers can proactively commission sell-side QoE reports and proactively share these reports with buyers in order to expedite the transaction process and build credibility, often leading to smoother negotiations.  A sell-side QoE that isolates issues such as customer churn or conflating recurring and non-recurring revenue can also help reset expectations on the sell-side and lead to sellers being open to accept a more realistic value for their businesses.

Other Common Issues for Technology Companies in Healthcare M&A

Beyond the issues described above, several other pitfalls warrant attention in today’s evolving technology deal landscape.

IP ownership and open-source risks remain paramount; buyers should verify proprietary tech is not tainted by unlicensed or third-party code, which could invite infringement claims, especially given increased use of AI in development activities.

Security threats also loom large, with AI-focused acquisitions facing heightened scrutiny amid a shifting political landscape and regulatory policies that are changing weekly.

FDA oversight for software as a medical device (SaMD) adds additional layers of complexity, requiring validation of clinical claims. Geopolitical tensions and antitrust reviews may prolong deal timelines, especially in cross-border deals.

Finally, integration of AI and data synergies demands careful planning to capture value without disrupting operations.

PE and family office teams should build multidisciplinary teams to address these issues with a goal of turning potential hurdles into strategic advantages.

In summary, healthcare tech M&A offers immense potential for PE and family office value creation, but success hinges on proactive risk management. Consult experienced advisors early to help navigate these issues and position your deals for optimal outcomes.

Tatjana Paterno, Davis Mello, Bob Brewer, Philip Lewis and Roy Wyman are all members at the law firm of Bass, Berry & Sims PLC. They work with companies on healthcare IT matters including investments, mergers and acquisitions, tax issues, intellectual property and technology transactions and licensing, and data privacy. More information can be found at bassberry.com.

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