Your Primer to Healthcare Mergers and Acquisitions

7 Reasons Why Some Healthcare Businesses Don't Sell (At First)

Oct 23, 2018

by Bradley M. Smith

by Bradley Smith, ATP, CM&AA and Tom Schramski, PhD, CM&AA

Volume 5 Issue 22, October 23, 2018

With over 60 combined years’ experience in the healthcare marketplace, we have seen many successes and some failures when representing healthcare owners who could not initially sell their businesses. In these latter examples they learned a hard lesson and, fortunately in some cases, were able to eventually transact.

Here are seven reasons why they encountered failure the first time around:

1. The market was changing, and they didn’t adapt despite ample warning 

A good example of recent times has been the many small DME businesses with a reliance on Medicare reimbursement that didn’t shift their business model in the face of competitive bidding. Most markets give considerable warning, but it can be hard to change when one is attached to a seasoned way of operating.

2. Inadequate financial reporting and lack of consistent attention to appropriate financial metrics

More than once we have encountered sellers that neglected to regularly monitor financial performance and then make adjustments that could substantially improve their results. For example, they may have managed a home health “lifestyle business” that was focused on short-term personal compensation (aka excess compensation), not the long-term value of their life-long investment.

3. They watched their business performance spiral downward and then decided to sell it as it approached the bottom

The psychology of distress often leads to the delusional thinking that their business will turn around if they “wait it out.” That rarely happens without significant corrective action.

4. The company was in a highly regulated environment that was subject to change

Contracting regulations can vary dramatically by state or region and if there is change in the wind then the risk appears very high even for heretofore successful companies. This is increasingly true in the expanding Medicaid LTSS market that is embracing managed care reimbursement models.

5. Management turnover was high and salaries may have been below industry standards for a significant period of time

Most buyers have their antennae attuned to this and see it as warning of even greater problems for the company. Human capital can ultimately lead to success that financial capital alone cannot achieve, especially in labor-intensive healthcare services.

6. Union shops and other restrictive employment agreements were in place

Investors in healthcare companies are typically quite wary of a unionized workforce and often attribute their presence to poor management. This is not a judgment about unions, but a concern about the agility of the organization for future development, particularly in the new emphasis on independent contractor models.

7. The company location was not suitable for growth

Most buyers expect to expand their acquisition to increase their ROI, especially in the case of private equity investors. No perceived scalability = no acquisition.

The great basketball coach, John Wooden, once wrote that “failure isn’t fatal, but failure to change might be.” In the situations described above we have seen numerous owners honestly assess their circumstances, re-engage with their companies and, after some time, successfully close a transaction. The necessary “change” that Coach Wooden spoke of was always apparent. The difference was the courage and discipline applied in the face of an original disappointment.

Bradley M. Smith

Bradley M. Smith ATP, CM&AA

Managing Director/Partner

For over 20 years, Brad has held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT, and home health care company, and BMS Consulting, where he has provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, he is a regular columnist for HomeCare magazine and HME News, where he focuses on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies. At VERTESS, Brad is a Managing Director and Partner with considerable expertise in HME/DME, home health care, hospice, pharmacy, medical devices, health IT, and related healthcare verticals in the US and internationally.

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