Note: This Q&A is based on a conversation between Polaris Healthcare Partners co-founder Diwakar Sinha and Jeff Cockrell, Partner at McGuireWoods and host of Welcome to The Professor’s Corner, a series by McGuireWoods delving into business and legal issues in the private equity industry. Click here to listen to the podcast.
Question (Cockrell): How have transactions been faring, and what are your observations regarding valuations and deal activities in the current market?
Answer (Sinha): Coming into 2023, we saw a slight dip in the number of deals when compared to previous years, but valuation expectations from sellers have remained resilient. Buyers are also being more selective, considering factors like leverage ratio, geographic footprint, and growth rates of the business. This year, there’s a trend towards a more cautious approach, perhaps influenced by the availability and cost of capital.
There seems to be a trend in scrutinizing earnings quality. Are you seeing this trend affecting valuations or potentially causing retrades (i.e. the practice of renegotiating the purchase price of real property by the buyer after initially agreeing to purchase at a higher price) in pricing during the deal process?
We are observing that quality of earnings is receiving more attention, and buyers are being meticulous in evaluating recurring revenue and other aspects of the business. This scrutiny can impact valuations and sometimes lead to renegotiations mid-process. It’s essential for sellers to anticipate and address these issues in advance.
Looking ahead, what’s your take on the cost and availability of capital, and how do you advise clients preparing for a sale transaction in this context?
We anticipate a drop in the cost of capital in the coming months, potentially by mid-2024. We encourage group healthcare practices to start prepping their businesses for sale now, aligning with this anticipated timeline. It’s crucial to be proactive and prepared for the shift in market dynamics.
To dive more deeply into the current economic conditions and what this could mean for your group practice, check out this podcast between Sinha and Perrin DesPortes that breaks down the recent McGuireWoods conference, and why it’s important to remain optimistic despite the economic headlines.