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7 Issues Healthcare CEOs Should Consider Before Engaging in M&A


While careful preparation may seem pedestrian compared to the excitement of a big transaction, it is the foundation of success in healthcare M&A deals.  In evaluating our most successful transactions, we found there are seven areas CEOs should focus in advance to improve their opportunities for a positive outcome.

1. A Thoughtful Understanding of Your Healthcare Vertical

Whether you have been in a particular healthcare niche for years or are entering it for the first time, carefully look at past trends and those that are likely for the future. Many areas of healthcare seem to change on a weekly basis.  A good example is the continuing evolution of the durable medical equipment (DME) marketplace, where continuing permutations of competitive bidding create both challenges and unique entrepreneurial opportunities. The DME market will continue to grow, but there remain open questions, including how reimbursement will be managed and how to effectively and creatively respond to changes.

2. Vision, Agility, and Targets

Great healthcare companies lead with a strong vision with ample room for tactical flexibility. Having a clear idea of where you are headed helps to eliminate attractive, but unaligned, target companies from the plan. You may find a very healthy behavioral health company with 25% EBITDA, but if that is not a good fit with your direction you could waste tremendous effort and resources in a quest for a target that is not a good fit for you.

3. Managing Due Diligence

Quality due diligence by an acquirer requires a very clear focus and template for the process significantly in advance of the actual due diligence effort. Creating a detailed checklist with input from all areas of management in advance of an offer and designating responsible parties increases the likelihood of a complete and honest appraisal of the opportunity early in the process. For example, this is often very important when issues of managing superficially incompatible EHRs come to the fore.

4. Managing Integration

Post-acquisition and merger integration is best initiated long before closing by an experienced team with a clearly identified process.  While an integration team will ultimately be formed with participants from the acquirer and target, the acquirer should consider integration early in a target search process and identify initial roles and key issues. This allows integration to become more central to the process, rather than an afterthought as is too often the case. Thinking about integration also forces the acquirer to consider the true expense of integration that can be lost in the race to closing, especially given healthcare regulatory requirements (e.g., Medicare/Medicaid) that may be very costly.

5. Financing and Working Capital

If not self-funded, healthcare acquirers need to sort through and evaluate the financing options available to them, especially when they are in a vertical where there are many shifting sands. This process of reviewing options should start before discussing a potential purchase with a target to determine how much support can be developed from various financing sources and avoid misleading a future partner. The same holds true for estimating working capital needs, because many healthcare sellers expect to retain their receivables in an asset purchase, which requires the buyer to incorporate this input into their LOI.

6. Planning for Inevitable Breakdowns

One client told me that before they started talking to potential targets, they made a list of “everything that could get screwed up” and noted the human/financial expense in these worst-case scenarios. This practical thinking gave them a clearer understanding of specific issues that could be problematic and enabled them to address those that did arise in an effective and agile manner. Something unexpected always happens, whether before or after closing.

7. Create a Team

Apart from internal management support, have financial and legal consultants in place prior to seeking an acquisition target. You will become better informed about various issues that may prevent you from going down a path that makes no sense given your level of risk tolerance.

Thoughtful preparation is no guarantee of a great transaction, but it increases the probability of a good outcome . The Roman philosopher Seneca wrote that “success is where opportunity meets preparation.” That makes perfect sense for healthcare CEOs pursuing grand visions in one of the most turbulent marketplaces of our generation.

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