Company: Published Articles: How to Make Ourselves More Valuable?
WHAT CAN WE DO TO MAKE OURSELVES MORE VALUABLE TO OUR EMPLOYERS AND ENHANCE OUR CAREER
GROWTH WHILE KEEPING THINGS IN PERSPECTIVE?
by Niels Andersen, President & CEO, KAMedData.com, Inc
Published in the ASPR Newsletter, Winter 1998
PRACTICE ACQUISITIONS, WHATíS THE DEAL? PART I BY NIELS ANDERSEN
In this two part series we will provide an overview of the steps typically involved in
practice acquisitions from the buyers perspective. If your organization is considering
commencing these activities, the following information can serve as a step-by-step overview to
the process. You can use this algorythm as your foundation on which to build and create your
own process. Not included are the technical tools, such as spreadsheets, evaluation forms,
contracts, and other critical analysis and implementation tools. This article is intended to
provide you with an overview of a process. In Part II we will discuss the two primary types of
acquisitions, advantages and disadvantages of acquisitions, and a few alternatives for you to
consider THOUGH PRACTICE ACQUISITION is indeed one of the alternatives organizations explore,
it is generally an expensive, labor intensive, and time consuming endeavor. Though some
suggest it costs less to acquire an existing practitioner than to recruit someone new if you
factor in all start-up costs. The buyer should thoroughly analyze the cost/benefit of either
route and compare them. Many organizations around the country are actively engaged in the
purchase of existing practices. Reasons include:
- Their competition is doing it
- To gain competitive advantage
- Assist in securing payor contracts
- Strategic positioning
The buyer should be clear on what they want to achieve, the purpose of this specific
alternative, and investment of capital and resources required. They must also determine if the
same or better results can be gained via other methods at the same or lower overall price
(hard dollars and/or political price). As providers you can conceivably increase your practice
value by banning together in the form of an IPA, MSO, or becoming a litigimate group, verses
remaining solo practitioners. If you become strong enough, political leverage can keep the
buyer out of your service area all together if that becomes your objective. Their probability
of success will greatly depend on the strength and conviction of your strategic business plan
which provides a broad overview of your organizations situation and it's alternatives. A solid
medical staff development plan must also be in place. Your group should have a medical staff
plan of your own in place and have a solid understanding of what their plan states.
The Acquisition Process
Once they have decided to move forward on this track and they have put their acquisition
team together, the overall process generally includes the following phases:
- Reaffirm and/or establish the acquisition objectives and goals
- Identify potential target community practice candidates
- Screen and target the candidate list to narrow their focus
- Establish initial contact with decision makers of target practices to determine
receptivity and gather initial information
- Consider having a “getting to know you” dinner or lunch meeting with key representatives
(physicians & management) from both parties
- Secure a Nondisclosure agreement (they should keep all their discussions with candidates
confidential, this is of benefit to both parties)
- Provide candidates with an overview of their process, their organizational structure
(including corporate culture) and operations, and realistic expectations of both parties;
financially, time-line, and the new relationship
- Make a realistic prognosis of the feasibility of the acquisition
- Secure financial statements from the previous three years, list of current payors, any
lease contracts on equipment and buildings, and other details regarding:
- - Equipment
- - Staff
- - Economics
- - Transition
- - Opportunity Analysis
- Reaffirm the sources of acquisition funds, sources of financing should be established
before they embarked on the acquisition venture
- Initial negotiations; establish the offer price with terms, conditions, and method of
payment (cash, equity in their organization, signing bonus...), and if employed, define the
financial package and benefits
- Issue a letter of intent, nonbinding agreement, or letter of understanding outlining and
recapping their understanding of their proposal; pricing, conditions, payment method...
- Complete due diligence analysis of the practice, tangible assets and non-tangible assets
- Establish and agree upon a transition process of staff and operations between their
organization and the physician’s practice
- Prepare and sign Asset Purchase, Lease, and Employment/Work Agreements/ contracts
- Closing
- Commence and complete transition process, staff training...
The process described above is continuous via various methods of communications (formal and
informal meetings, telephone contact, over a reasonable time-line).
Consolidation or Asset Acquisition
Generally there are the two types of acquisitions seen in today's healthcare industry,
consolidation and asset acquisition. In a consolidation a third, new corporation, is formed
and acquires both the assets and liabilities of the previous organizations. In contrast, in an
asset acquisition, only the liabilities stipulated and negotiated into the contract are
assumed by the buyer and the acquired company is generally liquidated, or absorbed into the
buyer’s organization. In this type of acquisition it is important to determine if compliance
with Bulk Sales Laws apply in order to avoid liability to creditors of the seller. It is the
buyer’s responsibility to notify any creditors at least ten days prior to the sale in order
for creditors to make arrangements with the seller. If they have the option of buying assets
vs. stock acquisition keep in mind that there may be some advantages of buying the stock.
Particularly as it relates to some leases and existing contracts. Favorable contracts, leases,
or interest rates may not be made available or transferrable to they organization if they buy
the assets. Of course not all practices are incorporated so buying assets may be they only
option. If you do have favorable leases, don’t forget to include that increased value in your
asking price.
Advantages and Disadvantages of Acquisitions
Advantages:
- Sometimes faster than internal development, recruiting from the outside and practice
ramp-up (remember if they are recruiting to satisfy community demand, acquiring existing
community providers won’t help them)
- Internal development may be impossible. Market entry barriers erected by their
competition.
- May be less risky, they are able to thoroughly evaluate past performance, reputation, and
can better forecast future performance
- Potential consolidation of billing, collections, and other operational and labor
resources thus reducing costs and minimizing duplication
- The seller may have a very attractive debt/equity ratio allowing the buyer the
opportunity increase their debt load
- Buyer may gain from obtaining the seller’s more efficient and effective operational
methodologies, seller may have a state of the art computer system for patient scheduling,
accounts receivable/payable, ...
- Acquiring a prominent and respected group in your community can also enhance the buyers
reputation, providing them with a competitive advantage
- From a time-line and entrenchment perspective, the acquisition alternative may be the
fastest and most productive way to secure their market place from local competition and
outside intruders
Disadvantages:
- They can overpay, particularly if this work is done by inexperienced people
- It is not always easy to meld the two personalities or organizational cultures
- Incompatibility between personnel and operating styles
- Their organization will usually never have as much information as they would like
- Antitrust; the law states they should have no more than 20% of the market, today many
organizations are approaching or exceeding 30% market share and thus fare without
governmental repercussions. Their legal counsel should be accountable for organization’s
compliance in this area
- Determine how loyal the physician/ group is and has been to their organization and the
community before they close on the deal
Time-line, can take 3-18 months to complete the deal. This can be an advantage or a
disadvantage, it may be faster than recruiting from the outside, target candidates could also
be trying to buy time in order to get a better deal with your competition. It is very
important to have a clear understanding of “drop dead dates,” if a candidate is not ready
within an agreed upon time-frame, they may move on to the next candidate. The window of
opportunity is very narrow in today’s very competitive environment.
Alternative Strategies
There are two primary alternatives seen today, contracting with community providers and
joint ventures in one form or another. Joint ventures could include assisting community
providers in establishing or joining various Independent Practitioner Associations, Management
Services Organizations, Physician Hospital Organizations... they can provide these types of
services no matter what type or structure their organization may be (HMO, hospital, integrated
system, or large group) When evaluating alternatives they should also determine why they are
doing this in the first place. If their organization is trying to gain market share or obtain
new business or both. Now the issue of Return on Investment (ROI) comes up. In most industries
outside of medicine, companies seek a ROI of 25-50% on each deal/ acquisition. Clearly this is
not probable or even possible given the empirical data we have gained from other acquisitions
in the industry. They have to expect to have a very low ROI with a very long repayment
timeline. If this is indeed the case, the most logical reason to acquire practices is for
security and entrenchment purposes.
Summary
As you can see, being the seller or the competition it is important to learn and become
adroit at negotiations as well. There are many important components involved in the
acquisition process from both the buyers and sellers perspective. Clearly there are many
technical components such as financial and strategic analysis to be completed during the
outlined process discussed previously.
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