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Thoughts and Takeaways from the J.P. Morgan Healthcare Conference

Last week healthcare dealmakers from around the world gathered in San Francisco for the 41st annual J.P. Morgan Healthcare Conference. After a three-year hiatus, the energy was high and the excitement was palpable. Waller had 15 members of its team in attendance alongside several members of the Holland & Knight team, the firm with which Waller will soon combine. We gathered our collective thoughts and takeaways on the key themes identified through our more than 50 meetings with investment bankers, lenders, private equity firms, healthcare companies and other advisors. Many of the predictions made by Waller’s David Marks and Morgan Ivey leading up to the conference certainly held true along with some additional themes, which we’ve summarized here.


Deal volumes
: In 2022, as a function of smaller value roll-up and platform add-on transactions,  healthcare services deal volumes continued to increase while deal values declined from the peak set in 2021.

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Steven Connor
Partner, Finance
Waller

“Due to the higher cost of capital and talks of an economic downturn, it’s likely to be a slow start to 2023 regarding healthcare services M&A. However, many industry insiders are expecting any downturn to be relatively brief and not too painful. Once rate hikes stabilize, I expect the volume of M&A deals to begin to pick back up. Private funds and corporations still have a tremendous amount of dry powder and they’ll be looking for creative tactics to deploy it.”


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John Arnold
Partner, Healthcare M&A
Waller

“We heard from numerous investors and healthcare company representatives, particularly those in more retail settings, that we can expect more companies to shift from acquisitions to de novos.”

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Mickey Sala
Managing Director
LLR Partners

“We anticipate a slower start to the year for platform deals so we are focused on building relationships with companies and intermediaries. We also plan to work closely with our portfolio looking for add-on opportunities to add density in services or strategic fit for complimentary tech and services.”



Deal certainty: There is a lot of chatter about how sellers can get comfortable pre-LOI that a buyer will have the wherewithal to close, without bogging down the sale process.

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Beth Vessel
Partner, Healthcare M&A
Waller

“Given the difficulties some buyers are facing with financing, showing a strong balance sheet and possibly even agreeing to certain financial representations may provide buyers with an advantage.”

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Rob Harris
Partner, Chair, Financial Services Industry Team
Waller

“After a long absence, we will see the return of financial due diligence on a buyer. We should expect to see a demand for no-out commitment letters and committed financing from sponsors and buyers when they are doing transactions. Strong buyers will rule the roost and it’ll translate into lower purchase price multiples because sellers will be willing to sell to someone who has committed financing and able to close a deal; they won’t be willing to take financial uncertainty.”

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MaryEllen Pickrell
Partner, Healthcare M&A
Waller

“Certainty of close is always a factor and in this uncertain environment, buyers with cash and no financing contingency will likely be selected over others by a willing seller.”


Deal speed: Given a variety of factors, there was a big push over the last couple years to get deals done quickly which required speeding up the diligence process.

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Lisa Nix
Shareholder and Practice Leader, Transaction Advisory Services
LBMC

“Sellers that are prepared for a transaction with strong financial teams, mature processes and systems, and quality financial results will achieve shorter deal timelines, enjoy a smoother deal process, and increase the probability of maintaining its valuation or achieving better pricing.  The preparation for a transaction process should not be underrated, which should include starting early and engaging legal and financial experts to assist with sell-side preparation well in advance of marketing a transaction. Buyers that commit to and have a reputation for shorter diligence timelines and less onerous diligence processes will continue to have an advantage.”

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William Seibels
President and Chief Financial Officer
IVX Health

“In the last two years, we were asked to put out bids with access to very limited information with a big push on speed and limited diligence and that doesn’t make us comfortable particularly in our business where you need to run a tight operation as it relates to revenue cycle management. This year, we will have better opportunity to move with a measured pace.



Valuation gaps: Valuations across healthcare sectors were at an all-time high during most of the last three years. For a variety of reasons, we’ve seen in recent months a widening gap between buyer and seller valuation expectations. Sellers are no longer getting the multiples they did in the recent past and will likely need to reset expectations.

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William Seibels
President and Chief Financial Officer
IVX Health

“Multiples have been incredibly high. Many companies in the last couple years were expecting top-tier platform multiples, even those that were a single center or ones with an underdeveloped management team. That’s going away and those transactions will not close if they are expecting those types of multiples.”

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Lisa Nix
Partner and Practice Leader, Transaction Advisory Services
LBMC

“We are seeing more and more deals where the valuations are not holding up to buy-side financial due diligence scrutiny, particularly with buyers keenly focused on mitigating valuation gaps with increased diligence of seller pro forma and run-rate adjustments – including the use of various data analytic tools and third-party specialists to assist in its evaluation of the seller.  This is ultimately leading to more re-trades – and yes, sellers resetting their expectations or buyers walking away.”


Valuations based on unproven financials: The COVID era (2020-mid-2022) saw a willingness to underwrite deals with high-end valuations based on less than 12 months of high-end performance, but with a chunk of purchase price paid with contingent earnouts. In 2022, we saw the reemergence of the earnout as a way to bridge valuation gaps between seller expectations and buyers.

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Rob Harris
Partner, Chair of Financial Services Industry Team
Waller

“We will continue to see that in 2023. The one thing sponsors and lenders need to focus on is the impact the situation has on their existing credit facilities. For example, if you have earnouts  or contingent seller notes you need to be looking at your leverage ratios and make sure you remain compliant under your credit facilities. As pro forma EBITDA drops, it has an adverse effect under y leverage projections and calculations; sponsors and companies need to be aware of that.”

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Steven Connor
Partner, Finance
Waller

“One way to alleviate the valuation gap is the use of earnouts, which provide for a contingent payment to a seller if the acquired business achieves certain financial goals after closing. Earnouts have been out of vogue for some time but have been making a comeback. We can expect interest in earnouts as part of deals to continue to increase, with sellers more likely to accept them due to their belief that buyers are undervaluing their company and financial conditions will improve in the foreseeable future.”

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Lisa Nix
Partner and Practice Leader, Transaction Advisory Services
LBMC

“In this current environment of economic and interest rate uncertainty, we are seeing less and less appetite to underwrite deals based on unproven performance on the high-end or with valuations primarily based on aggressive run-rate and pro forma adjustments to historical earnings. Sellers with these types of aggressive valuations are being met with challenging due diligence processes and elongated timelines which may include a roll-forward of historical financial results in efforts to see ‘proven’ results.”


Credit markets
: The shifts in central bank policy to combat inflation resulted in a tight credit market. This impacted M&A as the higher rates limited large-check financing and forced funds to be creative to get deals done and provide returns to limited partners (LPs).

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Elle McCulty
Partner, Finance
Waller

“Multiples have been incredibly high. Many companies in the last couple years were expecting top-tier platform multiples, even those that were a single center or ones with an underdeveloped management team. That’s going away and those transactions will not close if they are expecting those types of multiples.”


Regulatory headwinds
: In 2022, healthcare consolidators were acutely aware of the Federal Trade Commission and other regulators’ attention on private equity investment in healthcare. President Biden stated that healthcare was one of four areas he and the FTC would be watching closely. And, on January 5, right before we headed to the J.P. Morgan Healthcare Conference, the FTC announced a proposed rule to eliminate non-compete agreements that would have a dramatic effect on the industry. While many of our conversations in San Francisco noted concern for the proposal, most suspect that it won’t be as extreme as the proposed rule’s initial language.

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Beth Vessel
Partner, Healthcare M&A
Waller

“We should expect to see the proposed rule on non-competes take effect, at least in some form, hopefully with differentiation for highly compensated employees/senior executives and a broader exception in connect with the sale of a business. Then there will be court challenges. But it would definitely have an impact on how acquirors approach transactions, and may have an impact on valuations.”


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Morgan Ribeiro
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