M&A Negotiations – Follow Your North Star

June 14, 2023

Hosts Michael and Brad share the story of a plastic surgeon who was ready to close his practice and retire, only to be approached by a private equity (PE) firm with an intriguing offer. Tune in as we dive into the negotiation side of M&A transactions. We discuss purchase price, employee retention, and the expectations PE firms have when acquiring a practice.

Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at info@byrdadatto.com.


Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real-world experiences, creating simplicity in 3, 2, 1.

Brad: Welcome back to another episode of the Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my co-host Michael Byrd.

Michael: As a business and healthcare law firm, we meet many interesting people in various stages of their business. This season, we get to focus on the high stakes implications of selling a business. This season’s theme, Brad, is the Hitchhiker’s Guide to M&A. We have been guest heavy and have had many different professionals come in to offer their experiences and perspectives on M&A. Today, Brad, we go solo again.

Brad: Oh man, we are going out there on a ledge, Michael, and for those who don’t know, and this is the first time listening this season, M&A means or stands for mergers and acquisitions, which is really a fancy legal jargon for the buying and selling of a business or the assets [00:01:00] of a business.

Michael: So Brad, I read an interesting poll published in the Wall Street Journal last month on Happiness in America.

Brad: Oh, look at me. Humble brag, Michael. I like to read the whole Wall Street Journal.

Michael: Well, Brad, I can confidently say that I have a paid subscription to the Wall Street Journal. As to whether I regularly read the articles that I have access to read, not so much. Well, unless they have, they do have cartoons, no? I don’t know. I have to check. Maybe I’ll get into it then.

Brad: Yeah.

Michael: But I did read the Happiness article and it ironically, Brad, is a little sad.

Brad: Why? Did it say you’re not happy?

Michael: Well, no, Brad, it’s a poll, not a personal assessment.

Brad: Oh, you know

Michael: But so it was a poll kind of taking a survey of the happiness of people in America, and there were three categories for people to [00:02:00] respond. They could respond that they’re very happy. They could respond that they’re pretty happy.

Brad: Okay.

Michael: Or they could respond that they’re not very happy. Only 12 percent responded as very happy. This is the lowest level recorded since the survey started in 1972.

Brad: Sorry. All I heard was that I’m special because I’m exclusive in the 12% category.

Michael: Humbly speaking, of course.

Brad: Of course.

Michael: Yes. Yes. Well, in all seriousness, Brad, you and I both fall into this category as the very happy people and it is a gift.

Brad: Yeah.

Michael: I am very gratefu, but just reading kind of into the article, it was really interesting to see in the study the various factors that are indicators of the very happy people.

Brad: All right, well, I’m interested now. Let’s get some examples please.

Michael: So, overwhelmingly, the very happy people value strong relationships.

Brad: Okay. [00:03:00]

Michael: 67% of the very happy say that marriage is very important to them, regardless of their marital status.

Brad: Okay.

Michael: And, just as an example for context, as you know I like, the importance of marriage was 25% less important to the other respondents.

Brad: Okay.

Michael: The pretty happy and the not very happy people.

Brad: Gotcha. Did the article, you’re giving all those examples, did it also note that happy people like to sing the song, Don’t worry Be happy, by Bobby McFerrin.

Michael: You’re getting distracted, Brad.

Brad: No.

Michael: Stay on point.

Brad: Okay.

Michael: Yeah. And so, Brad, even beyond marriage, on the relationship front, I think about ByrdAdatto. I think the success of ByrdAdatto and the culture here starts with the fact that you and I became friends even before we started working together back in 2006.

Brad: Yeah.

Michael: And, I think this extends to the reason that most of our team, our clients, and as you hear every time we have a guest on this show, they’re friends. We say we have another friend on [00:04:00] our show, and they’re not just simply business relationships.

Brad: Okay. Well I’m glad we have all this happiness here, but what were the indications for the very happy category?

Michael: Some of the other ones?

Brad: Yeah.

Michael: Okay. Well, good news for you and me, Brad. Age was a big indicator.

Brad: Why’d you stare at me when you said that?

Michael: I was staring at your gray hair. Approximately 45% of the very happy people are 50 or older.

Brad: Okay.

Michael: And the majority of those are actually 60 or older.

Brad: Well, you’re old so I guess that makes you very happy to then.

Michael: Yes, it is. It’s all true.

Brad: But Riley seems really happy.

Michael: Well, just think how happy she’s gonna be when she’s 50.

Brad: Oh gosh.

Michael: Oh my goodness. Well, the other three biggest indicators of happiness are faith in God.

Brad: Okay.

Michael: Community involvement and an interest in fitness.

Brad: Okay.

Michael: Two thirds of the very happy people believe in God [00:05:00] and and then they value community involvement and fitness as much more important than the other categories.

Brad: Okay. Well, it sounds like keeping your body and soul at peace creates a happy mind. Were there any other categories that were not as important to the very happy people?

Michael: The very happy people do not attach high importance to money and are equally split as to political affiliations.

Brad: All right.

Michael: And I thought one of the most encouraging aspects of the poll for the very happy was that many of the very happy people reported pretty hard life challenges that they were currently going through, like helping a child face cancer or a divorce or something like that. So it’s not just a segment of people that have kind of got hit by the rainbow and don’t have any real hardships. These people, many reported having hardships.

Brad: All right, well, I’m happy that I’m ready to jump in today’s [00:06:00] story, but as usual, we like to give some context, you more than anyone else I’ve ever met. So this season we have different seasons of business. We have the five phases of M&A. We’re really near the end of the season so maybe you can give a super quick recap.

Michael: Yeah. So the setup of the season is based on this idea that every business is in one of four seasons of a business and that they all impact the season of selling. And so the first season is the building season, and then we have the operating season, and then we have the scaling season, and finally, the buying and selling season of a business, which is where we’ve been spending our time this season. And we talk about the five phases of an M&A deal to kind of paint the picture of what a selling or buying of a business timeline would look like. You have the letter of intent and then you go into the due [00:07:00] diligence phase, and then we go to definitive agreements, and then we have a closing and post-closing obligations. For today’s show, we’re going to focus on the art of negotiations in an M&A transaction.

Brad: Awesome. Well, I’m positive that I want to hear today’s story.

Michael: I’m trying to be very happy over there, Brad. Shoe horn it in there. All right. Today’s story, Brad, centers around the sale of a plastic surgery practice on the East Coast. Our client is a famous plastic surgeon. He’s known to most in the industry across the world. He was also ready to stop operating. We will call him Dr. Done.

Brad: I remember this conversation and Dr. Done did not have a buyer, basically. He had been communicating with us that he was getting ready to slow down or maybe operate for another year at the most, but he simply just wanted to close his practice. And he [00:08:00] didn’t really care if he could sell it or not really.

Michael: Yeah. I mean, your point, he was willing to turn the lights out if he didn’t have a buyer.

Brad: Yeah.

Michael: His hope was to sell it, but that was second to the fact that he was done.

Brad: Yeah.

Michael: And so Dr. Done and I explored several options to sell his practice to other plastic surgeons in the community and there was some level of intrigue, but no real momentum. The clock was ticking too. There was still like six months left until he was going to flip the light switch off and no real buyer had materialized. Out of thin air, a private equity buyer materialized who was open to buying Dr. Done’s practice and allowing him to immediately retire. We will call this private equity company, White Knight Capital.

Brad: Okay, well, [00:09:00] as we’ve talked about all season long, that is extremely unusual. We’ve discussed one of the key factors that any buyer is going to look at, especially an M&A deal when we have a professional entity like this, is the continue revenue after the purchase. In other words, they want the commitment from the doctors and other medical providers that they’re going to stay on at least three years, but normally we see five years.

Michael: Yeah, exactly. And this definitely made negotiations tricky. Dr. Done, as this conversation with this White Knight Capital was materializing, needed to validate to them that there was actually something for White Knight Capital to buy.

Michael: If he were to stop operating, post-closing. Fortunately, there were two young plastic surgeons with the practice, and Dr. Done was optimistic that he could convince them to stay.

Brad: All right. Well, how did these negotiations go?

Michael: Well, [00:10:00] there were many layers of negotiations to make all of this happen and so broadly the negotiations touched on the purchase price, which is kind of intuitive to most, the post-closing relationship and keeping the employed physicians.

Brad: Yeah and this is consistent with the variables we discussed throughout the season. This story so far seems like to be a great example of how negotiations can start playing out. So what happened with the purchase price?

Michael: So while it was a minor miracle to find private equity who was willing to entertain a purchase with the physician retiring at the closing, the purchase price was massively discounted, Brad.If Dr. Done had agreed to stay four or five years, the purchase price likely would’ve been between 10 million and 15 million. The valuation proposed by White Knight Capital was for 2.5 million. [00:11:00]

Brad: Okay, well, Riley told me there’d be no math today, but based on my limited math experience here, that appears to be pretty powerful illustrations of the difference in numbers there. So talk about the internal discussions with Dr. Done.

Michael: We had several hard conversations. Dr. Done was pretty emotional. I mean, there was a lot of emotional triggers that go with this because he was ready to retire. There was a lot of sense of value in what he’d built over the 35 plus years of practice. And someone just put a number on it that didn’t feel like it was what it was and thought, okay, I could get 10 million to 15 million and I just got an offer for 2.5 million. And I’ll have to say Dr. Done was extremely tempted to extend his career for the [00:12:00] sake of the valuation. And I think it was deeper than the money. I really do think it was more about the legacy and validation of what he built, but ultimately after many important conversations, he decided he was going to stay firm in his desire to stop operating.

Brad: Yeah and we’ve talked about this in other shows, but knowing your vision helps keep you anchored and grounded no matter what’s being offered to you. And basically for him following his North Star, even with the private equity, is willing to pay 10 or 15 million more allowed him to stay focused.

Michael: Yeah, no doubt. And so we got through all of that and so he’s good. He’s staying firm with his original plan, but then there was the temptation to go hard at negotiations to increase the valuation. If they offered 2.5, how much more can we get? [00:13:00] And Dr. Done, as I’ve said, he is a big deal and he knew he was a big deal. He understood that White Knight Capital was enamored with his name, that this would give credibility to their efforts to consolidate across the country, but time was not on Dr. Done’s side. White Knight Capital and the employed physicians did not know that Dr. Done was a mere months from turning out the lights. Of course, all of them knew that he was wanting to stop operating. None knew that he was willing to just flip the keys on the desk and walk out.

Brad: Because he was done.

Michael: Yeah and so we had more hard conversations about the negotiation strategy, relating to the timeline that we were under and every lost day in the negotiation process added risk that his number would be zero [00:14:00] and not 2.5 million.

Brad: Man, it’s like in my head, I can hear the stopwatch in the background, right? So I assume there was a strong push from the parties to get this deal done fast, Michael.

Michael: White Knight Capital was no different than most private equity and everything is kind of a created sense of rush. And, yet there was a dance going on here because there was a lot of issues to work through, but to your point, Dr. Done ultimately recognized that that it wasn’t worth the sacrifice in time to try to get a little bit more money on the purchase price and he decided that he wasn’t going to press for more.

Brad: Okay.

Michael: That he was going to be okay with the 2.5 million.

Brad: All right. So how does this connect with the post-closing negotiations you alluded to earlier?

Michael: Well, it connects massively. And it [00:15:00] actually was part of his reason not to mess with the purchase price because these other issues were so important to Dr. Done. Dr. Done was willing to walk and receive zero if this post-closing part could not be worked out and really Dr. Done was concerned about the brand for the existing practices at White Knight Capital. So again, Dr. Done was this famous surgeon, famous practice well respected across the world, and he had some legacy concerns with the reputation that he had built now being affiliated with some of these other practices with White Knight Capital.

Brad: Okay. Well, what were the types of things to negotiate?

Michael: Well, first was the equity role.

Brad: Ah, yes. Our old friend, Mr. Equity role. And we’ve discussed, audience members on other episodes in [00:16:00] the season that an equity roll is not something you order at a sushi bar.

Michael: Oh, it’s not?

Brad: No, it’s not.

Michael: Oh, okay.

Brad: I don’t think it tastes very good either. So for those who don’t know when, as Michael will can allude to, we get a purchase price. Sometimes it’s in cash, sometimes in stock. A lot of times in these deals they’ll come to you and say, Hey, the purchase price will be, 2.5 million, but of that we’d like to give you some of those in shares instead of cash. And as we grow, those shares actually can grow in value because we plan to be rolled up down the road in three to seven or ten years, depending on their plan of action.

Michael: Yeah and Dr. Done actually wanted to take most of this 2.5 million purchase price in equity. He believed if he could work out his relationship post close, he would bet on the upside to get him to that 10 to 15 million dollar exit that he was sacrificing now to be able to stop operating.

Brad: Yeah. This [00:17:00] sounds a little bit complicated. On the one hand you have said that Dr. Done is going to stop operating and then he has concerns about his reputation of his practice running and now it’s going to be run by White Knight Capital. And on the other hand, you said he wanted to take most of the purchase price in equity, which if you really start putting this all together, this is really highly unusual.

Michael: Yeah and just also remember, emotions were heavy.

Brad: Yeah. True.

Michael: And so it was a roller coaster ride trying to sort through these competing thoughts and it felt like walking on a tightrope on these negotiations. What Dr. Done was starting to realize during the course of negotiations was that, though he was done operating, he did have an appetite to be involved with the growing White Knight Capital. So he thought, yeah, it’s not just, I have concerns about the reputation, he wanted to get [00:18:00] involved to bring kind of the brand promise of Dr. Done’s practice into the global consolidated White Knight Capital. And he believed that he could leverage his relationships with industry and plastic surgeons throughout the country to benefit White Knight Capital, which would ultimately benefit his equity role.

Brad: Yeah and Dr. Done definitely has that kind of influence. So how did White Knight Capital receive these new negotiations or discussions really?

Michael: They were extremely intrigued because they were drawn to the opportunity to be connected with Dr. Done. We had many discussions back and forth on these topics, and Dr. Done was able to persuade them to rebrand post close and to allow Dr. Done to implement kind of his practice standards into the White Knight Capital discussions. Dr. Done was even able to negotiate a board seat onto [00:19:00] White Knight Capital post close.

Brad: Wow. It looks like things were coming together. What about the employee side?

Michael: Well, this actually became the most dicey of all discussions, mostly because of the timeline.

Brad: Yeah.

Michael: So the clock was ticking to get this deal done, as we’ve talked about. And now the entire transaction rested on whether the physicians would stay and there were intense discussions and negotiations to get the physicians to stay.

Brad: Yeah, I remember that their biggest concern was the same as Dr. Done. They were concerned about being affiliated with the practice after thinking that they had a primo job, they’re working with Dr. Done and now all of a sudden they’re working for White Knight Capital.

Michael: Yeah, exactly. And ultimately, White Knight Capital was willing to offer equity to the employed physicians to stay. Dr. Done even gave up a small portion of his equity role to the young surgeons to convince them to [00:20:00] stay. I actually think the biggest thing Dr. Done did was convince them that he wasn’t going away, that he was actually going to be involved in building this rebranded opportunity and so they were getting what they currently had, which was Dr. Done. They wanted to be connected with him and so that ultimately, them seeing his involvement and his vision was persuasive.

Brad: Awesome. So did the deal close?

Michael: Well, you would like to know, wouldn’t you, Brad?

Brad: I would. That’s why I asked.

Michael: Oh, well, let’s go to break and talk about some lessons to be learned from this story, and I promise I will tell you about the end of the negotiations.

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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my co-host Michael Byrd. Now Michael, our famous plastic surgeon, Dr. Done, was juggling a ton of issues trying to close, and at the same time sell his practice. And this story’s a great example of some of the complexity of negotiations that happen during an M&A transaction.

Michael: Yeah. It was an emotional rollercoaster. So Dr. Done started with emotions when he was talking to you and I at a conference about being done operating. And he’s like I’ve got a year. And, well, let’s do our best to figure it out. And six months go by so half of that [00:22:00] timeline and nothing really materialized. There was a lot of dialogue, lot of chopping, but no chips flying as they say. And then White Knight Capital appears. And that had a little bit of momentum to it. They seemed really interested in having Dr. Done join them or to sell. They wanted Dr. Done’s name to be affiliated with the practice and were willing, most importantly, for him not to stay, not to keep operating. And so we went through the negotiation journey of what happened during that transaction. As we said, it was focused on three big areas. One was the purchase price. How to deal with that. Number two was post-closing relationship, which in many ways, to Dr. Done, was the most important thing.

Brad: Yep, sure was.

Michael: And then, the kind of employee retention, which in many [00:23:00] ways was the most important thing to White Knight Capital.

Brad: Right.

Michael: And so there was a lot, it was a very interwoven, it wasn’t three siloed negotiations, so it made it tricky to try to work through the communications. Dr. Done did a really good job, you used the word North Star of holding onto his North Star and so we left off on the journey where it seemed optimistic that the deal was going to close, but Brad, I want you to talk about how negotiations are not about winning when there’s a future partnership at stake, especially, but more about finding alignment.

Brad: Yeah, and unfortunately, I’ll just start backwards, in some M&A deals the council or the parties only care about the deal and who got the upper hand. Negotiations start becoming more personal and parties start throwing foul names at each other. And really, you [00:24:00] know, rarely do these deals close with happy outcomes, right? Because if the point of the M&A deal is to have a partnership afterwards and finding the right place and agreeable terms makes a huge impact on the deal itself especially, you know, we’re talking about a lot of times it’s just post-closing obligations. There’s life after the deal. And, as we said earlier, as a reminder, most M&A deals, the doctors and their medical staff and other medical providers to other doctors, they’ll stay on for three to five years as employees. And in many cases, the owners will eventually become partners in a separate entity. We were talking about the rollups and the equity with these buyers. So having that focus, or as you said earlier, the North Star on what outcome do you want at the end, will help these deals and help you keep the alignment and you won’t get lost in the force of the negotiation tactics themselves. And, [00:25:00] more importantly, you’re able to keep the deal moving forward, but at the same time as you just summarized, focus on the most important aspects of the deal, in this case, Dr. Done.

Michael: I think about when, I randomly got some marriage advice, it wasn’t formal premarital counseling and we were talking about how you handle arguments and they were saying, if you want to win an argument with your wife, that means you want her to lose. And we all know how that turns out. If you have a winner and a loser in a marriage. Well, this is a business marriage in these circumstances. And so you’re setting the tone for your relationship and how you handle these hard conversations and in Dr. Done’s case in particular, there was a lot of emotions involved and when things went well and negotiations really [00:26:00] got momentum was when the parties were seeking alignment and seeking to understand. Where they would kind of hit a snag was when ego got involved or winning, got involved, being right was more important than understanding and we saw both in the deal. Mostly, especially as the real trust was built in the relationship through the negotiations, it became more about finding alignment and less about winning or losing.

Brad: Yeah, that makes sense. So, what happened with Dr. Done? You made a promise.

Michael: The deal closed, Brad.

Brad: Woohoo.

Michael: Yes. Dr. Done is the postscript, has been instrumental in several key acquisitions of other famous practices for White Knight Capital since then. It’s actually very exciting. Dr. Done has even worked out a compensation arrangement with White Knight Capital because they’ve realized after closing [00:27:00] how important this role is for Dr. Done to help in future acquisitions. And Dr. Done’s excited to have this kind of business role now that he’s stopped operating and he’s having a blast. So, Brad, what final thoughts do you have for today?

Brad: Yeah, I mean, first off, I’m very happy for Dr. Done. We’ve known him for a long time and I’m really proud of him that he was able to stay true to his goals, knowing that he was ready to stop operating, but at the same time maintaining the legacy of his name. And again, we’ve said it already, but really having that North Star to direct him. So Michael, what are your final thoughts?

Michael: Yeah, I mean, the North Star we keep alluding to, it’s so important before you negotiate to identify what’s important. And it’s not always as obvious as this case where it’s, I want to stop operating. And so it really becomes [00:28:00] important as you’re looking to sell and depending on what season of business are you in? What stage of your career are you in? What are you hoping to gain by going into this? And then you can identify what’s important and kind of to jump further into what we were saying earlier, if the focus is on finding an alignment and building a relationship, you’re more likely to be in the 12% very happy category and not the lesser sadder categories, Brad.

Brad: Okay. Well, that’s good to know. Well, audience members, that’s all the time we have today. Next Wednesday, we will continue on the journey of the Hitchhiker’s Guide to M&A, where we bring on for the first time ever, Michael, two people will be in studio with us as we bring the leaders of Maven. Jessica and Kristen will join us to focus on [00:29:00] getting your house, AKA your business, in order.

Outro: Thanks again for joining us today, and remember, if you like this episode, please subscribe. Make sure to give us a five star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at ByrdAdatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.

ByrdAdatto founding partner Michael Byrd

Michael S. Byrd

ByrdAdatto Founding Partner Bradford E. Adatto

Bradford E. Adatto