Organizational expansion is truly a tale of two options (primarily): add capacity organically (build or start from scratch) or acquire an existing business. Both have pluses and minuses, but when it comes to scale on a more rapid basis and movement into a new market area, acquisition tends to make more sense versus an organic start.
Acquisitions, done right, should pose minimal risk and almost always be quickly accretive in terms of new customers and new revenue. The largest hurdle to an acquisition is finding the right target, in the right location, at the right price. Sometimes, location issues can be the biggest obstacle, especially when it comes to healthcare acquisitions where licenses by state and possibly, CON (certificate of need) barriers create obstacles impossible (or impractical) to navigate.
In my career, I have done dozens of acquisitions and start-ups and advised on many more. The start-ups generally occurred as a result of not finding a suitable acquisition target (location, cost, etc.). Similarly, not all acquisitions make sense even if the initial review suggests that a particular opportunity fits the objective/strategy. Due diligence may reveal underlying risks such as claims concerns, legal issues, employment problems, etc.
The first step in getting the acquisition right is developing a strategic position that clearly identifies the “why”, “where”, and “what” components.
- Why are we acquiring? Market share? Additional outlet access to our core products/services? Capacity to serve additional customers? No other room to grow at a central location? Achieve scale (economies)?
- Where are we going to acquire? What are the location parameters? Is there a first, second, third preference? Are there locations that are off the table? Are there location-related regulatory issues?
- What is the scale we are looking at? Are there financial parameters? Do we want existing customers? Do we want existing employees? What condition must the business be in?
Getting these parameters clearly defined is akin to getting a golf club on plane before hitting the shot (odds of clean, straight contact are much improved). In other words, prior, proper, preparation, prevents, poor performance.
- Beyond developing the strategic position, the next steps are all about defining key risk parameters which, determine the format for the acquisition (aka the deal structure and the go/no go posture). If price has already been fundamentally set, the deal format is all defined around the structural elements. Back in 2010, I wrote a piece on this process and it is available here: https://wp.me/ptUlY-6S
The risk parameters or principal deal structural elements defined are here. Getting these right is central to getting the acquisition right or as the title says, creating the “Good Acquistion”. TGIF!
- Economic Location Analysis: Not to be confused with market research principally relying on demographics, this analysis looks deeper into the key economic location elements that are critical to the success or failure of the transaction at the given purchase price. For example, location analysis would quantify labor resources and costs – key elements for a healthcare provider. Location analysis would also quantify the strength and depth of referral patterns and the quality of such referrals by desired economic value (payer sources, etc.). Location analysis also examines the market economy and the up or downward trends that are present. Too many providers over-estimate the value of a particular location without understanding the economic factors that create or detract from the project’s value.
- Provider Status Assumption Risks: Buyers that are acquiring healthcare projects with existing Medicare business and expecting to assume the former provider’s Medicare number (most common in acquisitions) need to understand that the assumption of the Medicare number brings the assumption of risk. While it is true that lawyers will create indemnities and warranties that seek to limit the buyer’s assumption of risk, using these clauses to enforce terms when risks are present or encountered is often an expensive and fruitless exercise. In other words, the seller may no longer exist or as is often the case, will require the buyer to use an expensive legal process to enforce the indemnity and warranty provisions, all while the compliance requirements are inescapable to the current owner. Preferably, although not an expeditious process, buyers should obtain a new provider number and status for the project from CMS, targeted effective on the change of ownership – for Part A and Part B as applicable. It can be done as I have done it with each of my “former” acquisitions. By not assuming an existing provider number, the buyer avoids a whole host of issues and compliance problems that may or may not be disclosed or even known by the seller. CMS, as one would suspect, will only chase the “owner” of the existing provider number when problems arise or are detected and if that is the new owner, regardless of whether the issues pertained to a former operator/owner, the new owner is expected by CMS to be the sole source of remedy. CMS does not care about the terms of the deal between private parties.
- Billing Risks and Revenue Accuracy: This is a problem area that I see all to frequent. The buyer relies on the seller’s representation of revenues and does no further testing. I lost count of how many times buyers relied on accountant prepared or audited statements as being “gospel” only to find upon ownership that the revenues were over-stated. Why? First, even during an audit, accountants do not devote sufficient time or have often, sufficient expertise to analyze, the accuracy of the Medicare claims submitted by the seller. The typical tests are for basic paper-trail elements such as RUGs groups in SNFs matching the billing, matching the revenue postings. What needs to occur is a much more in-depth, technical review to determine if the Medicare claims that correlate to patients are in fact, correct. Again, I have seen circumstances where the Medicare revenue per day is grossly incorrect as the seller had no idea how to properly bill Medicare claims. Last, I rarely see buyers benchmark the revenue and occupancy numbers against area comparables. Payer mix and revenue per day numbers across the industry tend to fit pretty narrow ranges and when, in any transaction, they are out of this normative range, a red flag should rise.
- Compliance Risks: Another area that I see cause buyers problems time and time again. Compliance with certification, survey and accreditation standards is a function of past and yet to be. Acquiring a provider with past problems in these areas requires very careful analysis and discussions with regulatory authorities. Regulators need to be queried extensively and even, negotiated with when the buyer is acquiring a provider with a record of moderate to serious non-compliance. Don’t have the discussions or do the additional analysis and assuredly, run into compliance problems that cannot be deemed as “owned” by the prior owner/operator. Likewise, acquiring a provider with a reasonable or decent history doesn’t mean that the current status of compliance is clean. Sellers tend to wane on their commitments to compliance the closer the time comes to deal “certainty” or closing. A fair amount of time may also have passed since the current owner was re-accredited or surveyed. Complaints may be pending requiring regulatory review. What is certain is that once the acquisition is complete, regulators/surveyors will descend on the new owner in fairly short order. Take the time necessary to thoroughly review the past and current status of compliance.
- Market and Reputation Risks: Simply stated: How is the current provider viewed within the market? New ownership doesn’t mean new perceptions about the quality of the current operation. If the current operation is viewed marginally or even negatively, a new owner will have a great deal of work ahead to establish an improved or new reputation. If the business relies heavily on referrals (and most health care provider organizations do), it pays to check referral sources and other common influencers to understand the “market” perception that is in place.
- Environment and Infrastructure Risks: Assuming that acquiring an existing provider means that existing brick and mortar and equipment doesn’t require improvements immediately can be a false assumption. Existing providers may operate under waivers or as in some states, new ownership necessitates that the entirety of the project be brought to current code with the issue of a new license. Such is the case in Wisconsin. A thorough review of the environment and the infrastructure tied to building code requirements, completed by qualified individuals/organizations will minimize this risk.
- Employment Related Risk: Here I am not talking about the legal risks associated with handling employment issues during the closing processes. The risk that I am talking about occurs when buyers make one of two (or both) assumptions about the quality and stability of existing management personnel and/or, their own management personnel. The error I see too often made occurs with out-of-state buyers not acquiring sufficient local or area expertise and/or, having enough local support available via contractors (consultants, etc.) to ease the transition. Each market area and certainly, each state brings forth nuances and issues that require stable management and unique knowledge requirements. I’ve seen too many new owners underestimate the resources needed and over-estimate the ability of their management to handle new areas and states foreign to them.