From MVP to M&A: When Exit Diligence is the First Market Feedback

1. MVP in a Regulated Market: When Scoping Features Can Be More Than a Product Call

Entrepreneurs who are new to healthcare expect regulatory hurdles. But it often takes experience with the ideation-to-exit lifecycle to appreciate just how impactful those hurdles can be—and how deeply they can shape product decisions.

Under agile development principles, MVP features are built to gather real-world feedback before overinvesting in an unproven idea. That model works well in many markets. But in healthcare, skipping early regulatory validation can lead to costly rework—or worse, valuation losses at exit.

Even a successful feature, if misaligned with regulatory expectations, can become a source of friction in M&A diligence. Acquirers may apply a discount based on perceived risk—or demand escrow to cover potential liabilities. In some cases, “compliance gaps” aren’t just a matter of cleanup—they can stall or kill a deal.

As discussed in Defaulting to Delay, many startups put off scoping regulatory risks until later. But a quick regulatory scan at the right time can clarify whether you’re about to invest in a straightforward build—or a complex rebuild. It can also help:

• Avoid sunk time and opportunity cost from a bad build-vs-buy decision.

• Flag table-stakes features that might otherwise be learned one rejection at a time.

• Preempt valuation discounts tied to rebuild needs or compliance uncertainty.

2. From MVP to Margin: A Case of Tactical Success

Imagine a telehealth startup that wants to add prescribing functionality. At this point, the company has a choice. Although electronic prescribing ("eRx") is necessary to execute the company’s telehealth strategy, building an eRx module from scratch is not. There are, after all, many reasonably priced, SaaS-based tools already on the market.

But prospective partners are telling the product team there’s real money to be made in electronic prescribing. And the tech team’s back-of-the-envelope T-shirt sizing suggests it wouldn’t take too much effort to build a basic “electronic prescription pad” for the company's in-house physicians. Whatever else the feature might require could be iterated based on real-world market feedback.

That market feedback begins with outreach to pharmacies. After days of effort, the company learns that it must connect to a national eRx network. After back-and-forth with the network, the startup eventually receives the technical specs and onboarding contract—which includes a generic “compliance with all laws” clause. The team reads it as boilerplate and keeps moving.

Later, after gaining traction, the company partners with several payers—including those serving Medicare and Medicaid beneficiaries. The contracts contain buried clauses requiring the use of certified EHR technology, but those provisions aren’t mapped into product scope.

As the platform grows, the startup enters a partnership with a mail-order pharmacy that proposes default-routing of prescriptions to their fulfillment center. The developer is granted pricing discretion and keeps a share of the spread. Separately, another partner suggests embedding copay coupons in the prescribing interface—placing coupon-backed drugs at the top of the list. PHI is shared with a coupon processor to support fulfillment, without additional legal review.

On its own terms, the in-house eRx module is a modest success. While the “big money” never quite materialized, the feature delivers $3M in high-margin revenue against the company’s $100M in core telehealth business. By shallow focus standards, the agile process delivered what it set out to: a working feature, adoption, and new high-quality revenue.

3. Due Diligence and the $1B Problem

Fast forward to a strategic sale. The acquirer, a traditional healthcare company, is performing diligence. Telehealth is the core offering with $100M in annual revenue. The eRx module supports only $3M—but it still triggers a separate compliance track.

The diligence team brings out their checklist:

• HIPAA: Is the eRx system operating under a valid business associate framework? Are data uses and breach protocols compliant?

• ONC Certification (45 CFR Part 170): Does the module meet minimum functional expectations for certified EHR tech (e.g., SCRIPT 10.6, drug interaction checks, audit logs)?

• State Approval Requirements: Are state-specific requirements (e.g., in Ohio or Nevada) being met?

• FWA / Anti-Kickback: Do coupon displays or pharmacy routing arrangements comply with federal or state workflow and inducement laws? Are there any material false statements made in Medicare Advantage or Managed Medicaid payer contracts?

Their findings:

• The eRx module doesn’t meet ONC requirements and the system lacks approval in applicable states.

• 3M prescriptions were subject to ONC-certification obligations via payer contracts subject to Federal healthcare program obligations.

• 2.5M prescriptions involved unauthorized PHI disclosures to a coupon vendor without a valid BAA.

• 1.25M prescriptions violated state commercial messaging restrictions.

• No safe harbor was satisfied for premium-based pharmacy routing.

The acquirer estimates the potential regulatory exposure at over $1 billion. Although the actual enforcement risk is likely far lower, the acquirer has no interest in absorbing worst-case downside. To offset that risk, they reduce their offer by 60% and demand a substantial indemnity escrow. The deal ultimately falls through—even though the eRx module contributed less than 3% of the company’s annual revenue.

That’s a costly moment to receive market feedback from your—and your investors’—ultimate customer: an acquirer.

It’s also a problem without a quick fix at that point in time. Even swapping out the eRx module won’t erase the legacy exposure an acquirer must factor in. And it’s a problem that could have been avoided years earlier by licensing a low-cost e-prescribing tool—shielding a $100M-per-year telehealth business from exit risk.

4. Final Thought: Exit Valuation as Product Inputs

Even in an agile environment, early regulatory scans are an inexpensive way to pressure test your T-shirt sizing and validate assumptions about the long-term impact of product choices. Business partners may never articulate—or independently validate on your behalf—the implications of “compliance with law” clauses, so that segment of the market may not provide the feedback that can matter at exit.

By contrast, a well-executed regulatory scan can flag table-stakes features, high-risk architectures, and silent expectations that will shape due diligence—and valuation—down the line.

The right time to gather regulatory feedback isn’t just before launch. It’s before you go too far down the path of building a solution that could quietly accumulate cost and risk. In healthcare, the best path to MVP isn’t always the fastest—it’s the one that preserves your enterprise value at exit.

Disclaimer: This blog is for general informational purposes only and does not constitute legal advice. For help evaluating the compliance implications of your product roadmap, consult qualified legal or compliance professionals.