Anatomy of a Medical Spa Sale: Mergers and Acquisitions

In part two of a Medical Spa Insider podcast series, Ben Hernandez of Skytale Group offers a detailed look into a medical spa sale or M&A (merger and acquisition). In this episode, he explains what to expect if you’re a seller approached by an investment company, including:

• The typical timeline for a sale;
• What information buyers are initially looking for;
• How to structure an LOI;
• What to look for in an investment partner.

You can listen to the full episode, or read the highlights below.

How long is the typical medical spa sale timeline?

When a medical spa seller goes to market, the timeline lasts around six to nine months. For a smaller-sized med spa with one or two locations, the timeline will be on the shorter side. Keep in mind that the tails can add in a few more calendar days. Prep work on the front end may take several weeks or months. And on the back end, the due diligence process with the buyer’s LOI can take 45 to 90 days.

In a nutshell, the timeline begins when you, the med spa owner, decide you are ready to sell. You typically engage a broker or investment banker to assist in the process. Together, you will clean house–examine paperwork, prepare financials, and collect the necessary information for a potential buyer.

Once your med spa goes to market, your broker will ask buyers to submit an Indication of Interest (IOI). An IOI is the precursor to actual negotiations. As a non-binding document, the buyer suggests how much they may be willing to offer and a general deal structure. You and your broker can use these IOIs to filter out non-serious contenders and get a pulse on the market’s interest.

After months of meeting buyers and collecting IOIs, you will hone in on your top buyers and ask them to submit an LOI. You’ll negotiate the LOI with the buyer before you ever sign. Once you sign, you are committed to exclusivity–negotiating with that buyer only. Read further to learn what key components to look for in an LOI.

What information are buyers initially looking for?

Just like you are scoping out a private equity group or buyer you trust, they are doing the same. Buyers want to see that your business is organized and operating smoothly. And they want to know if the relationship with the owner–you–will be successful.

Medical spas are a service-oriented business. You, the owner, are a good indicator of how excellent your service is and how pampered customers feel. Plus, the negotiation process will require intensive communication between the buyer and seller. Buyers want to know you are someone they’re willing to negotiate with. Ultimately, if the medical spa sale goes through, you may be asked to stay with the company for three to four more years for a smooth transition. That means the communication will continue–and both parties want it to be a positive experience.

Additionally, buyers want to know about your team structure. What is the culture? What will the transition look like post-close?

Private equity firms are also looking at your financials. How long have you been in business? Are you profitable? How clean are your books? You can refer to our blog about 7 financial strategies for med spas to assess your financial situation and present it to a potential buyer. Review past cost of goods sold and fixed costs, increase cash flow, calculate your break-even number, compare your numbers to industry standard, identify costs you can reduce, and create a plan for the future.

Lastly, be ready to converse with buyers about the state of the industry. Ben shared on part one of the podcast that conversations with both buyers and sellers point to a profitable path for today’s med spa and MSO owners looking to sell. According to Market Watch, the global market expects to grow by $31.5 billion by 2025 with a compound annual growth rate of 13.3%. The industry is ripe for med spa sales, and you can stay informed on compelling buyers of your value.

How is a medical spa sale LOI structured?

A Letter of Intent (LOI) is more than just a dollar amount. It is a binding document for negotiation–once you sign, you are committed to negotiating with only one buyer. The outline of an LOI will likely begin with a certain percentage of cash at close. For a $10 million offer and 75% cash at close, that means that buyer will put down $7.5 million once the transaction is finalized. The LOI may include a holdback as a form of insurance. And the remaining 25% may be a roll-in, where the $2.5 million is invested in the new venture. This puts the buyer in the seller’s favor to stick around even after the M&A.

The LOI may also include terms such as a non-compete, not-solicit, etc. These terms are not financial, but have significant impact on the activity that happens post-transaction.

It’s advantageous for a seller to get as much information in an LOI as possible before the signature. Once the LOI is signed, the buyer holds exclusive negotiating power. Even if the LOI has an end date, you can keep communication open with the buyer, negotiate terms, and push the end date as needed until you’re comfortable with the deal you’re signing.

What should a medical spa owner look for in a partnership?

Entering into a partnership with a private equity firm is not unlike entering a marriage. Will you respect each other even when negotiations get tough? How do past sellers feel about their experience with the buyer? Does the firm have any former focus on healthcare or industry-related ventures? Do your due diligence before signing an LOI to ensure the process is as painless as possible.

An often-unspoken truth is that after the transaction is complete, the person you were sitting across from at the negotiation table is now your business partner. Companies like Skytale Group make it easier for med spa owners like you to sell your life’s work. We sort out the gritty details with the buyer and lawyers and translate the most important information to you. Negotiating your business is deeply personal. By staying one step removed, you can more easily maintain a positive post-purchase relationship with the buyer.

What are the benefits of working with a company like Skytale Group?

This is probably the only time you will ever sell your life’s work. You wouldn’t sell your house by yourself–you rely on realtors and their industry knowledge to manage the difficult parts. Skytale understands the market and where to find buyers. We work with sophisticated private equity buyers and sift through deals that work in your favor. You will need to comb through your financials, human resources, marketing, and operational information before going to market. And we can help you present your story correctly.

In summary, your med spa sale can be highly successful if you know how to navigate a buyer relationship and recruit the help of experts. Do you want to start the conversation about how Skytale can help you with your med spa M&A? Contact our team today to ensure maximum value for your med spa business.