Key Takeaways
- Take a close look at the present situation: Stay current on industry trends and regulatory changes (federal and state) that can alter valuations or deal feasibility.
- Identify key intangible assets early: Intangible drivers like technology, data, brand reputation, patient relationships, and proprietary processes fuel future growth and profitability.
- Select the optimal transaction structure: Deal structure (asset vs. stock purchase, earnouts, equity rollovers, etc.) can materially change the net outcome for both buyer and seller.
- Complete regulatory compliance and due diligence: Buyers of healthcare M&A must evaluate the target’s compliance with Stark, Anti-Kickback, and HIPAA rules and understand the required approvals.
- Align expectations in the current market: With over $75 billion in private equity funds, well-prepared acquisitions will still find money, but buyers and sellers must adopt realistic valuation strategies as healthcare values shift from peak levels and investors become more discriminating.
A successful M&A transaction is a journey that begins well before closing and continues well beyond. Since 2021, new obstacles and possibilities have complicated that journey in healthcare. Higher interest rates, post-pandemic care shifts, and heightened regulatory scrutiny have cooled the frenetic deal pace of the early 2020s, but optimism is returning in 2025.
Dealmakers are adapting to the “new normal” – sellers are moderating their price expectations, and buyers are finding creative ways to bridge valuation gaps. Significant dry powder in the market (over $75 billion in private equity funds earmarked for healthcare) means well-prepared deals can still attract capital despite a tougher environment.
Buyers and sellers in healthcare M&A must examine the following three pre-deal value factors.
1. Survey the Landscape
Before every deal, it’s critical to examine the industry’s operating landscape and the target’s position. Buyers typically use their industry knowledge and the target company’s Confidential Information Memorandum (CIM) (or a similar document) to highlight broad market trends and the target’s strengths. However, there are two potential blind spots to watch for:
Blind Spot 1 – The passage of time and regulatory shifts
The healthcare industry is highly regulated, and policies can shift between the time a CIM is drafted and deal closure. It is important to understand both federal and state regulations affecting the target at the time of valuation. For example, Medicare’s 2024 Physician Fee Schedule final rule implemented a 3.4% cut to physician payment rates – a major reimbursement change that could impact revenue projections for physician practices and clinics.
At the federal level, regulators have also ramped up antitrust scrutiny on healthcare deals. In 2024, the U.S. Department of Justice moved to block UnitedHealth Group’s $3.3 billion acquisition of home health provider Amedisys, signaling a tougher stance on large consolidations. Meanwhile, states are changing their oversight policies of healthcare M&A. Indiana, for instance, enacted a 2024 law requiring parties to notify the state attorney general at least 90 days before closing certain healthcare transactions. On the other hand, South Carolina repealed most Certificate of Need (CON) requirements in 2023 for healthcare facilities, potentially opening the door to new competitors in previously protected markets.
These examples illustrate how quickly the landscape can shift. What was true about reimbursement, competition, or legal requirements a year ago may have changed by the time you’re evaluating a deal. Both buyers and sellers must stay abreast of such changes – failing to account for a major regulatory development or market trend can lead to mispricing a deal or encountering unwelcome surprises later.
Blind Spot 2 – The information gap between broad industry data and company specifics
While industry reports offer a broad view, they often miss niche-specific details. Buyers should validate seller-provided data by researching the target’s segment, geography, and competitive environment. For instance, a specialty clinic’s valuation should consider local referral networks and reimbursement models, while a health tech firm may face sector-specific regulatory scrutiny. Robust due diligence ensures accurate valuation, giving buyers confidence and helping sellers highlight unique value drivers like market dominance or specialized services.
Regulatory compliance and approvals are critical in healthcare M&A, as transactions may require state or federal notifications and approvals. Buyers should assess the target’s compliance health early, including any fraud-and-abuse issues, billing audits, or HIPAA breaches, as these can impact valuation and deal feasibility. Conducting thorough due diligence helps buyers anticipate risks and refine their purchase price while ensuring regulatory alignment.
2. Intangible Asset Identification
In any acquisition, beyond tangible assets and earnings, the true value lies in intangible assets and future potential. Buyers and sellers benefit from the early identification of these assets, which drive revenue, profitability, and long-term value beyond financial statements.
Consider what intangible assets the target has, such as:
Proprietary technology or intellectual property can significantly enhance valuation, especially if the target owns patented medical devices, specialized health IT systems, or proprietary drug formulas. Cutting-edge technology with IP protection often outweighs the book value of physical assets, while outdated systems may require costly upgrades, lowering appeal to buyers.
Data and analytics are valuable assets in 2025, with rich patient and clinical databases offering strategic advantages. A health system that acquires a clinic network values not only patient contracts but also data-driven insights that support value-based care models.
Brand equity and strong relationships with patients, physicians, and payers are key intangible assets in healthcare M&A, driving sustained earnings. A trusted reputation and high patient satisfaction enhance valuation, while reputational damage or quality issues can negatively impact deal prospects.
Workforce expertise is a critical intangible asset. A highly skilled clinical team or innovative leadership can drive value, making retention strategies essential for a post-close. Buyers should assess whether key individuals impact valuation and plan accordingly with equity rollovers or earnouts to secure talent continuity.
Understanding intangible assets is essential for assessing a company’s long-term value. Two companies in similar financial positions can have very different futures due to their intangible assets. Consider two healthcare technology firms:
Company A has an old but reliable software platform and loyal hospital clients. Company B has a modern AI system but faces high customer turnover. Both companies are in similar financial situations, but Company B’s innovation might lead to a higher valuation, while Company A’s stability provides steady returns. If both companies made $50 million in revenue last year, a simple valuation might see them as equal. However, a smart buyer will recognize that Company B’s patented AI technology and growth path could justify a higher value, or if the churn indicates instability, it might be seen as a risk. Company A has had steady financial performance, but its outdated technology may hinder future growth. By identifying intangibles like A’s strong customer relationships and B’s superior tech IP, a buyer improves their investment thesis and valuation model for each. Sellers should highlight their key intangible assets to support their asking price. If you have it, show it with proof during negotiations.
Intangible liabilities like pending litigation, unfavorable contracts, technical debt, or cybersecurity vulnerabilities can lower valuation. Many healthcare companies have faced data breaches that disrupted operations. Compliance issues or obsolete systems often lead to indemnities, escrows, or price adjustments. Addressing these risks early can prevent significant valuation reductions.
Focusing early on intangible assets and liabilities benefits both buyers and sellers. Buyers gain a clearer understanding of what they’re acquiring beyond financials, while sellers can highlight strengths and mitigate weaknesses to maximize value. Identifying these factors early helps shape pricing and post-deal integration strategies.
3. Transaction Structure
Warren Buffett’s quote, “Price is what you pay, and value is what you get,” highlights the importance of deal structure in M&A. The way a transaction is structured affects both seller proceeds and buyer asset value. Evaluating various structure options early helps maximize value and mitigate risks, ensuring a successful outcome for both parties. Some of the most impactful elements to consider include:
Asset vs. stock purchases impact taxes, liabilities, and regulatory requirements. Stock purchases benefit sellers with capital gains treatment and minimal disruption, while asset purchases allow buyers to step up asset values for tax benefits and avoid legacy liabilities. However, asset deals can require recredentialing, license transfers, and contract assignments, adding complexity. Buyers may require indemnifications in stock deals to mitigate risks. Selecting the right structure requires balancing tax efficiency, liability concerns, and regulatory factors, making early consultation with advisors essential.
Earnouts provide additional payments to sellers if performance targets are met post-acquisition, helping bridge valuation gaps and align incentives. Buyers use earnouts to mitigate overpayment risk, while sellers see them as a way to increase deal value. Their prevalence has grown, with earnouts included in 33% of deals in 2023, up from 20% in 2021. Both parties should clearly define terms, including performance metrics, timelines, and operational commitments, to ensure fairness. Earnouts also impact accounting and integration, introducing potential earnings volatility and requiring careful management to align interests.
Roll-over equity allows sellers to keep a minority share after a transaction, aligning their interests with the buyer. Its worth relies on terms; if it has equal economic rights as controlling shares, it preserves its full value. Otherwise, it may be depreciated because of illiquidity or subordinate status. While sellers should evaluate its actual value early on, buyers use roll-over equity to ensure continuation. A structured rollover helps both sides by encouraging long-term investment and involvement in future growth.
Equity compensation is often used to retain key management, physicians, or employees post-close. While these incentives drive performance and retention, they can dilute ownership and impact future earnings. Buyers should assess dilution effects on EBITDA and ownership, while sellers should balance reduced upfront payout with long-term benefits. Structuring incentives carefully ensures value creation without compromising deal economics.
Post-transaction accounting adjustments under U.S. GAAP revalue certain assets and liabilities at fair value on the closing date. Deferred revenue may be written down, reducing first-year revenue, while inventory adjustments can temporarily impact gross margins. Buyers should evaluate these effects early as they influence financial projections and debt covenants. Sellers should anticipate potential valuation impacts and strategically time the closing date to mitigate revenue adjustments.
A target’s intangibles, growth drivers, and deal structure significantly impact value outcomes. A well-structured deal aligns risks and rewards, ensuring compliance with healthcare regulations and optimizing tax implications. Engaging experienced transaction advisors early helps buyers and sellers navigate regulatory hurdles, tax considerations, and deal structuring for optimal outcomes.
Navigating Healthcare M&A: Unlocking Value Through Accurate Valuation, Smart Structuring, and Strategic Insight
Success in healthcare M&A requires understanding market trends, valuing intangibles, and structuring deals effectively. Even with changes in regulations and the economy, there are still opportunities for buyers and sellers who are ready. Informed buyers make better offers, while sellers with clear expectations negotiate effectively. In an environment where investors are wary but funds are plentiful, ventures that are well-structured have the best chance of success. Staying flexible, thinking creatively, and leaning on expert guidance can help you navigate challenges and achieve long-term success.
Accurate valuation is crucial for private equity success in healthcare M&A. From following regulations to valuing intangible assets and structuring deals, LBMC’s healthcare valuation experts offer the insights and guidance you need to make informed, data-driven decisions. Partner with LBMC for a valuation approach that aligns with industry best practices, mitigates risk, and maximizes value. Get in touch with us today to chat about how we can help with your healthcare M&A strategy.