In 2025, it’s expected interest rates will normalize and gradually decline as the Federal Reserve works toward their goal of achieving a 2% inflation target. This movement in interest rates could deploy pent up dry powder, or cash and liquid assets for investment, and release a flurry of mergers and acquisitions (M&A) in the health care ecosystem. As of early January 2025, health care focused private equity closed end funds have amassed $338.5B of dry powder available to be deployed in the health care ecosystem.
Health care organizations that understand the intricacies surrounding accounting and financial reporting implications are better equipped to manage a smooth process to a successful deal outcome. Meticulous preparation, thorough evaluation and proactive communication are essential.
Preparation for M&A activity
With an expected heightened deal activity on the horizon, organizations should begin strategically thinking about how they can make this process a seamless experience. Areas to consider are:
- Engage in due diligence in areas like financial, legal and operations to identify areas that can be optimized to increase the likelihood of a stronger multiple and successful deal.
- Ensure fixed-asset, inventory, lease and customer schedules are accurate and updated to help identify intangibles and assess value of the organization.
- Assess accounting policies for areas like revenue recognition, fixed asset useful lives and leases are updated and in conformity with the latest accounting standards.
- Complete technology readiness assessment to help value the maturity of the organization’s technology stack.
By focusing on these areas, organizations can jumpstart a well-managed pre-transaction buy-side analysis for those contemplating a transaction within the next 12 months.
Post-transaction considerations
Thinking forward in a post-transaction environment, there are several considerations to keep in mind once a deal is complete. These are:
- Understand the mechanics and timeframe of earn-out and working capital settlements.
- Evaluate new equity and operating agreements for accounting nuances such as accounting for stock options and warrants.
- Understand new tax and debt reporting requirements.
- Implement best practices in revenue cycle management to monitor cash collections.
- Develop a system for cost allocation if multiple legal entities are acquired in the process.
Post deal, it’s important to engage with valuation, tax, audit and other specialists early in the process. Most deals will have compliance deadlines to report financials statements that are aligned with generally accepted accounting principles and could also require various types of filings and tax returns.
Additional considerations
In addition to the aforementioned points, there are other strategic actions that health care organizations can undertake to ensure a smooth M&A process:
- Develop a comprehensive integration plan early in the process to address cultural and operational challenges.
- Establish clear communication channels within the organization to keep all stakeholders informed.
- Conduct regular post-merger reviews to ensure the anticipated synergies and benefits are being realized.
- Invest in technology and infrastructure to streamline the scalability of the post-acquisition entity.
The takeaway
Health care organizations should prepare for an uptick in M&A activity. To navigate the complexities of these transactions, proactive preparation is key, involving meticulous due diligence, accurate financial reporting and alignment with current accounting standards. Post-transaction factors such as understanding earn-out mechanics, evaluating equity agreements and managing tax and debt reporting are essential for a smooth transition. Additionally, a strong focus on integration planning, clear communication and continuous post-merger evaluations will help ensure the successful realization of synergies, ultimately positioning health care organizations for a seamless M&A experience.
Danny Schmidt
Danny Schmidt is a senior manager in the assurance practice and a health care senior analyst for RSM US LLP. As a member of the Industry Eminence program, Danny works alongside the firm’s chief economist and his fellow senior analysts to understand, forecast and communicate economic, business and technology trends affecting middle market businesses.
Nick Ward
Nick Ward is a Health Care Audit Policy Leader for RSM US LLP (“RSM”). Nick has been serving clients for over thirteen years in the health care and insurance industries. During this time, Nick has focused primarily on serving hospitals, health systems and health insurance companies. Nick is responsible for all aspects of audits, including planning, execution and reporting. As health care audit policy leader, Nick works in RSM’s National Professional Standards Group, overseeing the firm’s audit methodologies and training audit teams use to serve clients in the health care industry.
