Due diligence in middle market healthcare M&A. The boutique consulting firm advantage

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You’re a middle market private equity firm that’s just signed an LOI with a profitable and growing healthcare company. What started as a proprietary deal turned into a competitive process and you had to stretch toward the top end of your valuation range to win. Now you have a few weeks to complete the due diligence process and close the deal. A boutique consulting firm specializing in M&A for healthcare companies may be your best bet to assist.

What help do you need?

When middle market PE firms hire consultants for commercial due diligence of healthcare companies they usually have a few objectives:

  • To generate insights on topics that are critical to the investment thesis. There are often macro questions, such as the fate of healthcare reform after an election or the speed of adoption of a new technology. Then there are questions about the competitive landscape and specific competitors, and about market demand and the needs and satisfaction levels of key customers. Sometimes the potential buyer also needs an assessment of the management team and company processes. A PE firm can do some of this work itself, but often finds it useful to leverage additional resources and skill sets, such as the ability to extract valuable information from players throughout the industry on an unnamed basis.
  • To gain access to an objective third party that can play the role of a constructive skeptic and thought partner, making sure that investors don’t let their desire to close the deal cloud their judgment. The best consultants have the instinct, gravitas and wisdom to challenge consensus thinking and are willing to point out potential pitfalls in a deal and to counsel against proceeding when needed, even if the potential buyer doesn’t seem to appreciate it at the time.
  • To prepare for a fast start after closing by generating and validating compelling strategic initiatives and tactics.
  • To get as much high quality support as possible in a tight timeframe while staying within a reasonable budget.

What firm to hire?

Premier strategy consulting firms such as McKinsey, Boston Consulting Group, and Bain have strong due diligence practices serving PE firms. There are solid reasons for their success. These firms can:

  • Mobilize large teams of highly intelligent consultants around the world to gather and analyze data. They hire the best and brightest from business schools and undergraduate programs.
  • Leverage their knowledge base and industry networks built from hundreds or even thousands of relevant client assignments. Their proposals often reflect the perspectives and data they have assembled over the years.
  • Produce high-grade graphical presentations, with professional staff dedicated to consistent, visually pleasing outputs.
  • Offer their brand name as a seal of approval, which is reassuring to investment committees.

But boutique firms, typically consisting of 3 to 20 professionals, represent a superior due diligence option for middle market private equity firms. Why?

  • Consultants at boutique firms are often former senior professionals from the big, premier firms. The consultants performing the data gathering and analysis are frequently more experienced than the partners from the big firms, who are mainly selling and managing client relationships while fresh graduates staff the cases. A boutique firm’s consultants don’t need time to get up to speed, which is crucial when the project is only a few weeks long.
  • Boutique firm consultants are generally better than their big firm peers at thinking like investors and board members. Many gain this perspective by serving as board members of PE or VC-backed companies and as LPs in PE and VC funds. This profile makes it more likely that the consultant will approach the work with a practical, focused mindset, crisply addressing the questions that really matter. This differs from the classic strategy consulting project that employs elegant but often theoretical approaches. In select cases a consulting team member from a boutique firm is appointed to the board as an independent director post-closing, something that is generally not possible with a big firm.
  • Certain boutique consultants are entrepreneurial and commercially astute. When appropriate, they highlight opportunities for post-closing business development and partnering to help the new owners hit the ground running. Compared with the big firms, there are fewer constraints on introducing clients to one another and aligning with the PE firm for commercial success.
  • Professional fees for the engagement are usually a fraction of what the big firms charge. There are multiple reasons for this. Boutique teams are smaller and flatter because there are no trainees. Consulting veterans don’t need mid-level managers to watch over them. Everyone on the team pulls their weight; no one is there just to boost the billings. There are fewer fixed overheads like HR, administrative staff and downtown offices to cover, and boutiques are not charging a premium for their brand name. All this means that boutique firms can pay staff as well as the premier firms while still offering compelling value to clients.

I co-founded the company that became Health Business Group back in 2001. At that time most of our clients were former colleagues from my days at Boston Consulting Group who had moved into PE firms or senior management roles at companies. After being on the inside they understood our value proposition. Over the next few years we attracted new business from referrals and networking. Recently, we have been pleased to receive a number of qualified inbound inquiries from our website contact page, which represents a change in how clients find consultants. Middle market PE shops are searching the web specifically for boutique healthcare consulting firms to perform due diligence. After interviewing us and checking our references, they often bring us on board and are pleased with the working relationship and results.

By healthcare business consultant David E. Williams, president of Health Business Group.

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