Merger before Sale

July 18, 2022

by a searcher from Northwestern University - Kellogg School of Management in Denver, CO, USA

I own a medium-sized children’s mental/behavioral health practice. I’m in conversations with another pair of owners who have a very complementary practice – different services with different types of clinicians; but we serve the same population and in fact share many clients.

If we combined our practices ahead of an exit, the whole will be valued at more than the sum of the individual two parts. This is because our services and employees are very complementary but not duplicative; and because it will push our top and bottom lines over perceived valuation-multiples thresholds.
I’m inclined to de-risk the process by merging and then selling together, as opposed to buying the other practice outright and then selling it all on my own. We would want to streamline the integration – keep costs down and execute on the most valuable opportunities to integrate – with a focus on a successful execution of the ultimate sale while minimizing impact/change to the employees.
Thus, I’m looking for experience shares on mergers of similar entities as opposed to one entity doing an add-on acquisition of the other. Any structural differences? Differences in post-transaction integration? Things to consider? Thanks!!

Reply by a professional
from University of Pennsylvania in Washington, DC, USA

Hi Kelly, I think combining businesses makes economic sense (the multiples go up as your business is bigger).

However, a merger is not that different than an outright purchase (perhaps you mean that you would pay for the complimentary practice with equity instead of cash).

In any event, I don't think this is de-risking. In 2021, I completed two separate deals representing clients selling their mental health practices. Six months after each deal closed, I've found myself guiding my clients in a messy separation from the business. Happy to share more about some of the pitfalls offline - redacted

Reply by a searcher
from Northwestern University in Denver, CO, USA

Someone in my EO chapter shared that he knows of a deal where two companies signed an agreement to essentially sell together in order to achieve a higher valuation multiple than what each would individually get. There was no actual merger or acquisition prior to the sale and each business continued to operate independently.

I'm digging in to get more info of course. But it sounds too good to be true. Yes, it's de-risked, efficient, faster and easier than dealing with a PMI before a sale. But I would think buyers would balk at this and still value the two companies independently.

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