One of the opportunities in a down economy – if you are not too down yourself of course – is the potential to pick up some bargains. Which is not without its rewards – and its hazards. The April 3 issue of Business Week features How to Make Acquisitions in a Down Economy as the cover article in the Small Biz section. In this article, Amy S. Choi passes on some wisdom and experience which can be useful to healthcare leaders as they consider purchases – be they physician practice acquisitions, hospital or clinic takeovers, or purchases of healthcare-related businesses.
Ms. Choi opens with the following opportunity statement: “The declining economy has left a raft of formerly solid businesses in distress, making it the right moment to consider whether an acquisition might make sense for you.” But she balances with warnings about carefully differentiating opportunism with impulse buying!
Lots of people (medical practices) and businesses (hospitals and health-related services) are running for cover either because they are in true financial distress, they are afloat but can’t capitalize growth, or because they simply are not sufficiently risked tolerant to remain independent of a larger organization with deeper pockets at this time.
Any of these can potentially work out well but only if you are a strategic purchaser. But there’s the rub. “It’s vital to understand exactly what you will need to get out of a purchase, whether it be cash flow, employees, customers, real estate, equipment, or technology. Be wary of buying a business that you suspect will complement yours but that you don’t fully understand.”
Tips for Opening the Door Safely
Ms. Choi provides a few pearls of advice which I’ve expanded upon to apply to bargain hunting health care leaders:
Look in the Mirror: This translates to being sure you are financially and organizationally prepared for an acquisition. It’s not only about the cash but also about the impact on your balance sheet and debt capacity. Being able to write the check is necessary but not sufficient to make a bargain affordable. And consider carefully which assets are most valuable to you.
In purchasing a physician practice, will it be gobbled up whole or does the deal turn on shedding support staff and systems in order to achieve economies? If so, what will be the impact on practice morale, culture, and performance? How good is the fit for your organization?
If it’s a hospital acquiring a community service provider, will the purchase add value by lowering costs or expanding the market or creating enhancements in efficiency or internal satisfaction? Or will something be lost? Could you do better by investing the same capital internally?
If it’s a defensive purchase – someone else will grab it up if you don’t – question your competitive assumptions to be sure they are correct. What is the true opportunity cost of purchasing defensively?
Sell Yourself: “We are reminded that As a buyer, it’s also important to sell–yourself. If you’re making an unsolicited offer, present the deal as advantageous to everyone.” Solicited or unsolicited, I’ve seen plenty of relatively well-heeled health systems fail to do this and lose deals – and relationships – even when the seller is initially highly interested and motivated.
A respectful purchase and sale process leaves the seller with a sense it is valued and you will add value to its future. This may be even more important when you are getting a bargain and the seller knows it. It’s bad enough for a seller to cash out for less than what he feels he is worth. It’s insulting to be treated as though you have low value. Indeed, since purchasers are only buying because there is inherent value in the transaction, it is disingenuous to leave the seller with a sense of being undervalued.
Do Your Due Diligence: You can’t overemphasize the obvious, and Ms. Choi is crisp on this point: “No matter how big (or small) your acquisition, you’ll need to get a comprehensive picture of the business… A full scrub of your target’s finances is the first order of business… Often forgotten is cultural due diligence.”
Yes, it’s about financial soundness. Yes, it’s about reputation. Yes, it’s about fit. Any shortcuts were taken because you “know” the seller is likely to come back to haunt you. Always use internal or external dispassionate experts. How many times have we experienced being burned by the “obviously trustworthy” other party? See the Wall Street Journal’s January 9 article Why We Keep Falling for Financial Scams to remind us all about our due diligence vulnerabilities.
Close the Deal: The Business Week article mostly addresses the relative benefits of purchasing assets over stock. Obviously, this will be very important in some healthcare deals. But I’d reframe this pearl as “make the deal.” The financial structure is obviously important and has to work. But the operational, management, performance and productivity expectations aspects are particularly critical components of making it work – especially in the provider practice acquisition arena.
As opposed to a strictly transactional business deal measured by its financial profitability, most health care deals need to actually work for professionals and patients. This may mean compromises on the money may be appropriate in pursuit of high levels of trust, commitment to a common vision, and mutual understanding of performance expectations. Making the right deal in these areas will make all the difference. And it’s where health care deal makers and healthcare leaders have often stumbled in the past.