Your Primer to Healthcare Mergers and Acquisitions

Underappreciated Key to Healthcare Acquisition Success: Staff Retention

Jan 31, 2022

by J. Blake Peart

Volume 9, Issue 2, January 25, 2022

Acquisitions are increasingly a way of life in the healthcare industry. Yet one of the most essential factors for achieving success following a sale that is sometimes never discussed or only brought up toward the end of the transaction is staff retention.

Why is retention so important? Before we can answer this question, it's helpful to gain an understanding of how acquisitions may be perceived and experienced by a healthcare organization's staff.

An acquisition is a complete separation and sell-off of a company. It usually involves the existing ownership and, in many cases, upper leadership eventually stepping down from their positions following completion of the transaction. An acquisition tends to have a great impact on current employees concerning job security and produces a strong psychological stress due to uncertainty. Acquisitions usually bring substantial changes to operations in a short period, transforming the employee experience in the process. In other words, the company that employees worked for before the acquisition may be — or simply feel — dramatically different following the acquisition.

The relationships between ownership, leadership, and staff can change greatly throughout the acquisition process. Studies have shown that 50% to 70% of mergers and acquisitions across industries fail to deliver what was promised, according to employees of the organizations involved in the transactions. When assessing acquisitions of healthcare organizations with 100 or more employees, the same studies indicate 60% to 75% of current employees express dissatisfaction with the outcome.

These figures are alarming. During any healthcare acquisition, the primary concerns of the owners tend to be revenue, current balance sheets, and future earnings. If a transaction involves a specialty hospital or ambulatory surgery center — types of clients I often support — growth avenues will always be considered when a buyer is seeking an acquisition opportunity. Unless the buyer intends to dissolve the organization or replace all its staff, an organization's existing staff play a crucial role in future growth predictions and performance.

Strength in Numbers

A notable factor to understand concerning employee retention and its effects on transactions is the current state of healthcare personnel staffing. For the last 30 years or so, our nation has experienced a substantial nursing and healthcare professional shortage. Over the last couple years, we've been battling an epidemic that has blistered our existing healthcare professionals. We see increasing burnout throughout the healthcare community, with people dropping out of and fewer people entering the community.

When the news reports that local hospitals are indicating that 80% to 90% of their beds are full, most individuals perceive this to mean 80% to 90% of the physical beds in the hospital are occupied with patients. This is usually inaccurate. What this number likely reflects is the number of beds existing staff can adequately support.

For example, let's consider a hospital with 150 physical beds. If 90 of those beds have patients, you would conclude the hospital is at 60% capacity. However, if you only have enough staff to provide care for 100 patients (beds), the hospital capacity reported will be 90% even though there are 60 unused beds. This clarification is not typically explained when news sources report these figures. This can make one think that a pandemic, seasonal illness, or other healthcare concern is affecting more people than it is. Whereas it's easy to picture what is meant by a hospital having all its available beds occupied, it can be much more difficult to understand and quantify a lack of staff required to take care of patients requiring beds.

Why is this information important when considering an acquisition? Many buyers are willing to overlook poor 2020 and 2021 financials of potential acquisitions, acknowledging that the pandemic has caused unusual levels of disruption and atypical effects on the financial performance of organizations. What is more important during an acquisition from the buyer's perspective are the predictors of future revenue. These predictors are typically based on pre-COVID-19 trends and multipliers, with additional gross and adjustments added to the overall multiple and requested purchase price.

However, consider for a moment if your organization lost 30% of its medical staff and healthcare workers — possibly at a time when you were already understaffed. It's easy to see how this could have a tremendous effect on predicted revenue moving forward. That's on top of the patient care and safety concerns that would accompany such a high level of staff turnover.

It's important for the seller and buyer to understand these basic staffing principles and formulate a comprehensive plan and strategy when an acquisition is under consideration, during the acquisition process, and then post-acquisition. Throughout the transaction, communication with staff is the key to the successful retention and engagement required to best ensure an organization will achieve its predicted revenue following the transaction.

Here are five steps sellers and buyers will want to take to best achieve these goals.

1. Inform seller's staff of the acquisition

Once the seller has agreed to an acquisition with a buyer and a tentative closing date is established, which is typically 6 to 9 months post-agreement, this information should be immediately communicated to the seller's key leadership and employees. It is in the buyer's and seller's best interests to make the transaction go smoothly for everyone, but senior leadership is often so focused on the technical side of an acquisition that they forget about the communications facet.

The most important communication about the pending transaction is with key leadership (e.g., CEO, CNO, COO, managers). The CEO should be the first person informed and they should facilitate the meeting with other key leadership. The owners must be honest, be forthcoming, and answer every question they can to the best of their ability, taking into consideration what's appropriate at this stage of the transaction.

The next meeting should be with the employees. By the time this meeting occurs, leadership should understand the appropriate talking points — not because it's what they've been told to say or not say, but because they now understand the process that's underway and why it's occurring. It's vital that leadership buys into this process and the owners are forthcoming and genuine when discussing what's ahead. Facility leadership should know their employers better than anyone else and understand and appreciate the challenges that will be facing them throughout the transaction and post-acquisition. It is best that leadership meets with all employees. For large organizations, this may require a video call.

During the company-wide meeting, key leadership and owners must be ready to take and answer questions. If an employee asks a question that cannot be answered at that time, leadership should inform the employee that they will get an answer to them as soon as possible and follow through.

Leadership should also establish a preset date to reconvene with employees. It is best to hold ongoing conversations with employees to provide updates, share any new information, and give assurance that the transition process is moving along as planned. If changes to the timeline occur, employees should be informed.

2. Buyer meets with seller's team

It's best that the buyer also meets with the seller's key leadership and then employees, preferably sooner in the transaction process than later. This will give the buyer an opportunity to showcase themselves and essentially provide a pep rally for the transition process and eventual outcome. The buyer should be prepared to take questions and provide answers.

Going into these meetings, it's important for the buyer to be cognizant of how employees are likely feeling about the news of the sale. Many will be worried about their livelihood and wonder whether they will have a job following completion of the acquisition. Employees often feel helpless during acquisitions. They know it's going to happen and there's nothing they can do about it, yet they will experience the consequences. Buyers should assume employees will take a "glass half empty" outlook on an acquisition. This is not to suggest that all employees will view the acquisition as a negative development. Rather, they know they're along for the ride with no input into the process or outcome.

3. Celebrate!

As soon as the acquisition is complete, hold a celebration. Provide a large lunch for employees and have the buyer and seller participating in person. One of the largest concerns and most frequent comments from employees expressing dissatisfaction with a transaction is that they feel they are not heard nor considered important by those executing the purchase and sale. Some employees give many years of service to an organization and should be recognized for this work and commitment. A celebration is a way to provide recognition, help strengthen the engagement of employees in the new entity, and begin moving forward on a positive note.

4. Proceed carefully with leadership changes

As noted, an acquisition often involves a change in leadership. If not executed carefully, such a change can cause significant stress and dissatisfaction for employees. A seller and buyer must understand that maintaining morale of employees is essential, especially during the acquisition process and the first several months — and sometimes longer — following completion of the transaction.

When a leadership change will occur, develop a strategy for announcing the news. Establish a strong human resources presence to provide support and guide this transition effectively. Inform key people within the organization about the change and how it will affect operations so they can communicate the news to staff and provide additional support. Remember: Perception from employees is not always reality, but it is their reality. If a leadership change is not communicated appropriately, you may experience a mass exit even if the change is in the best interest of the organization and employees.

5. Survey employees

If the intention of the new owner is to grow the organization they are acquiring, it's their responsibility to learn what has worked well for the organization thus far and then establish strong employee morale that can build on those successes while addressing unsatisfactory practices. A survey of employees during the later stages of the acquisition process and within six months following completion of the transaction should provide key information on how to address grievances and concerns associated with the ownership change and any leadership changes.

As previously noted, change, even under the best of circumstances, can promote fear because of what's unknown. The better a buyer and seller communicate about the transaction process and what the future is likely to be for the acquired organization, the better received the buyer should be from the people who will continue to represent the organization.

Prioritizing the People Factor

It's good to remember that an acquisition can take many months and sometimes years. This is typically understood by the seller and buyer. A transaction can usually be achieved when a realistic timeline is established and followed. Both parties need to remain transparent and engaged, transaction success is largely about dotting the i's and crossing the t's.

But remember: A transaction for employees is not so cut and dry. It's an emotionally charged experience — with emotions that are often not positive and an outlook that's not optimistic. That's why sellers and buyers must approach a transaction in a very humanitarian way — one that carefully takes into consideration the effects that such a change may and will have on its people.

When considering the impact of employee communication from a financial and future revenue perspective, it's vitally important to understand that retention and employee satisfaction is critical to meeting goals and completing the terms the original acquisition was based upon. Nothing will affect the bottom line more than being depleted of the very people who generate revenue for the organization, thus crippling the ability to meet the future projections.

Current and future earnings are not just the result of a good business plan; they also require the incorporation of a workforce that an organization can rely on, build on, and trust will serve the best interest of the organization. This can only be accomplished when that very organization serves the best interests of their employees.

J. Blake Peart

J. Blake Peart RRT

Managing Director

Blake has had the opportunity of an extensive and diverse career in healthcare for over twenty years. In the past ten years, he has served as CEO for multiple hospitals of Fortune 500 companies and CEO for several large Ambulatory Surgery Centers. In addition, his operations and business development knowledge have allowed him to experience the entire M&A process from start to finish focusing primarily on private equity transactions. His history as both a CEO and clinician provides a unique perspective based on years of experience and empathy when working with business owners seeking M&A advice. Blake's expertise is in Ambulatory Surgery Centers, Physician Practices, and independent hospital businesses. He is committed to supporting healthcare business owners who select the M&A direction as one who has walked in their shoes. He knows that every transaction is unique and tailored to a seller’s need in getting the best deal and providing a positive experience throughout the entire process.

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