Randy Overton says in health care M&A in recent years, he's seen all kinds of books.
"All of the sudden, everybody is the most valuable company in the world," says Overton, CFO of FastPace Health. "A lot of those deals didn't get done because when you start seeing through it, you start seeing this is triple the volume."
Now, he says, the spigot is drying up.
"We're starting to see normality come back, where folks that had very optimistic outlooks are coming back to reality," he said during the Nashville Smart Business Dealmakers Conference. "The value that they were hoping to get really wasn't ever there. And now they're starting to come to reality and realize it themselves."
In deals with heightened valuations, Overton says transacting can be tricky. The seller and possibly banker have their ideas of the valuation, so it's up to the buyer, he says, to bring them down to reality.
"You're always going to base things first in historical," he says. "You start with historical and say, Do I believe what they're telling me going forward."
As a strategic buyer, Overton says he typically uses debt to fund acquisitions. Since debt has gotten a lot more expensive, it made the company more guarded when it came to what they brought into the fold.
"There's a thesis for every single acquisition we do, and then we're going to operate on it," he says. "A good company is still going to get a good multiple. Where you're going to get challenged is on the pro formas, on the add-backs."
In an environment in which debt is expensive, especially where covenants are involved, buyers should be cognizant of whether the pro formas are real.
"Not only are they real, when are they going to be realized?" he says. "If this is a three-year realization for this, (it) may not give you much credit for it. If it's a six-to-12-month realization, we can probably get comfortable with that. So, it's really around, first, do we believe in them, are they real? But second, when do they come to fruition? And that's super important in this type of environment."
Another consideration is that while the earnings may be attractive, is that converting to cash?
"Because a lot of times they may have hiccups, particularly on the health care side, with revenue cycle, with credentialing, those types of things," Overton says. "So, really homing in on some of those operational components that ultimately drive EBITA to cash, because it's super important."
There are deals he's been on where he's had to pause because what the target projected, maybe because of the passage of time, is not reality. While it's best if that situation doesn't arise, he says when they do the hope is that a discussion with full disclosure can happen. That requires that the two sides have built up trust, otherwise it can appear as if the buyer is attempting to retrade.
For those looking to grow and ultimately sell their business, his advice is to get the everyday things right — taking the time to invest in the small things.
"It's the small things that lead to the big things that make you actually successful," Overton says. "It's building the foundation for a great company, it's building the foundation for the ultimate growth that somebody's going to be willing to buy."
Regardless of the reason for or type of acquisition, he says in each business he explores he's looking at what has been built over the company's history.
"Part of our diligence is understanding not only the numbers, but what's not in those numbers," he says. "What are we going to have to actually take EBITA potentially down for, because there wasn't those investments in the company, historically. That's how we're going to look at the business. That's how I would encourage folks that are growing businesses is making those investments, really building the foundation for ultimately a bigger company, because people are more willing to pay for that and pay for that growth that's actually sustainable growth that's not smoke and mirrors or band-aided together."