Five most common issues for HealthTech Founders during M&A due diligence

In todays' market, the five common issues the Nelson Advisors team expereinec for HealthTech founders during M&A due diligence are:

1. Regulatory and Compliance Deficiencies

This is arguably the most critical and distinct issue for HealthTech. Companies often fail to meticulously document and adhere to complex regulations like HIPAA (in the US) or GDPR (in Europe). Buyers are extremely risk-averse regarding data privacy and security.

Any gaps in compliance, such as improper data handling, unaddressed vulnerabilities, or a lack of formal quality management systems, can be a major red flag that devalues the company or even kills the deal. 

2. Intellectual Property (IP) and Ownership Gaps

For a tech company, especially one in a high-value sector like HealthTech, IP is its core asset. Due diligence frequently uncovers issues where the company doesn't have clear ownership of its technology.

This can happen if code was developed by a contractor without a proper "work for hire" agreement, if an employee's contract doesn't explicitly assign IP to the company, or if patents are not properly filed and maintained. Ambiguity in IP ownership creates a legal nightmare for the acquiring company and can halt the acquisition entirely.

3. Lack of Clinical Validation and Commercial Proof

Unlike other software companies, HealthTech's value is often tied to its clinical effectiveness and real-world impact. Buyers will conduct a deep dive to find evidence that the product works as claimed.

Founders who lack robust, documented clinical studies, case studies showing a clear return on investment (ROI) for providers, or a diverse, high-retention customer base will struggle to justify their valuation. A high customer concentration, where revenue is heavily dependent on one or two key clients, is a significant risk factor.

4. Poor Financial and Operational Documentation

This is a universal problem for startups, but it's especially problematic in HealthTech where stakes are high. Disorganized financial records, inconsistent accounting practices (e.g., mixing cash and accrual accounting), and a lack of documented operational procedures make it difficult for a buyer to assess the true value and health of the business.

Without clean and transparent financials, buyers lose confidence and will often assume the worst, leading to a reduced valuation or a deal collapse.

5. Over-reliance on the Founder and Lack of Scalable Processes

Many startups are built around the founder's vision and personal relationships. During due diligence, buyers assess the "key person risk." They want to know if the company can operate and grow without the founder's daily involvement.

A lack of a strong second-tier management team, a dependence on the founder for key client relationships, or an absence of documented, repeatable processes and standard operating procedures (SOPs) will raise concerns about the company's long-term sustainability and scalability post-acquisition.

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