Three Reasons Why Medical Practice Mergers, Acquisitions Fail

May 22, 2013

Key pitfalls your medical practice should avoid when evaluating a potential merger or acquisition.

Why do 70 percent to 90 percent of all mergers and acquisitions, including those of medical practices, fail to deliver on the objectives that motivated them? 

The short answer is that the parties involved rush to get the deal done before it falls apart.  As a result, they focus on quantitative information and neglect the qualitative; and they emphasize the benefits the consolidation is expected to provide and avoid identifying the inevitable tradeoffs. 

Here are three reasons mergers and acquisitions tend to fail, and some tips for how to avoid these pitfalls when evaluating a merger or acquisition:

1. When parties are considering a merger or acquisition, their considerations are generally limited to valuation, rather than evaluation.
Financial statements, contracts, and bank statements provide valuable information, but they do not tell the whole story.  They do not say much at all about how the practice, or the acquiring organization, operates.
Here are some key questions practices should ask to properly evaluate a merger or acquisition:
• What is the culture?  Are people happy, casual, formal, rigid, driven, income focused, cutting edge, or conservative?  It does not matter what the answers are.  What counts is that they are similar for both organizations, or that attention is paid to accommodating the differences. 
• How does each organization practice medicine?  Understand that an affiliation brings joint liability. Is that a risk you are willing to assume?  The reputation of a practice is not necessarily a reliable indicator.  Someone needs to spend some serious time in observation.
• What are the goals of the parties?  These are seldom the same, but they should be explicit.  A practice is often unclear on its own objectives as well as those of the larger enterprise.  It is impossible to negotiate and evaluate effectively without being clear on the objectives of all the parties.

2. Financial projections capture the benefits of being associated with a larger organization, but they often fail to address the downsides.
Merging may bring with it a new set of financial burdens that both parties must consider. Organizations with 50 or more employees, for instance, are subject to mandates that exempt smaller organizations.  The Family Medical Leave Act is only the most obvious one.  These requirements can have material effects on employee costs that are only apparent as situations arise.
The employee benefit packages are generally significantly richer in a large organization than they are in a small practice.  Projections must capture those costs, as well as ancillary income that will be lost with affiliation.

3. The smaller organization, and its leadership, consistently underestimates the changes to its modus operandi.
Practices joining up with larger entities must consider how it will affect the way they practice. Anyone who has been accustomed to running the show will have a hard time adjusting to being a cog, even an exalted and valuable cog.  New requirements will crop up, such as vacation time needing to be scheduled and budgeted; and coming in late after being on call may result in a charge to vacation time.  Small changes, such as no longer being able to provide coffee and soft drinks to employees may crop up, and cell phones (and Ipads) may be authorized for replacement on a schedule independent of Apple’s.  There will be substantially more bureaucracy (and elapsed time) involved in hiring a new employee or getting rid of an ineffective one.
The smaller organization is also accustomed to choosing its own vendors, and equipment, and that is very likely to change.  The good news is that someone else will assume the responsibility for the decision.  The bad news is that someone else will assume control of the decision.  Dealing with internal service providers (IT, Billing, etc.) will probably become more expensive and more frustrating than getting those services in an open marketplace.

None of these changes is necessarily a deal breaker, but life can be miserable if they are surprises and weren’t factored into the decision to affiliate. 

The single best predictor of a successful merger or acquisition is the time, care, and leadership devoted to a thorough due diligence up front.  Each pays an outsized return on the investment.