March 10, 2017 by Reece Tomlinson
When it comes to taking your clinic to the next level, one impactful way of doing this is through the acquisition of other existing clinics. When performed correctly, acquisitions can create large scale value for the acquirer. They offer the ability to grow sales, gain market share, increase profitability, and generate synergies. Unlike organic growth, they create large jumps in revenue, which can launch your clinic to the next level quickly. The desire to acquire another clinic and grow their clinic is a discussion I seem to regularly have with our clients around the world. For most, the thought of an acquisition is nothing short of frightening; however, the perceived benefits seem to intrigue almost anyone who has dreams of a second, third, and subsequent clinics. Perhaps, the hesitation to go down the route of acquisitions is warranted. The majority of acquisitions fail to perform as expected. A recently study by the Harvard Business Review states that only 50% of acquisitions are successful at adding shareholder value while another study by the Cass Business School in London found that 60% of acquisitions failed to create value.
From my experience leading global businesses and utilizing strategic acquisitions as a pillar for growth, I have seen the benefits of acquisition-based growth first hand. I can attest that when executed properly, acquisitions can present a highly effective method to grow your business and increase profits. Regardless of the size of your clinic or the dollar value of the acquisition you are considering, there are certain key considerations, which from experience, can dramatically increase the likelihood that an acquisition will be successful. This article aims to provide clear concepts, I have developed from my experience, that can be implemented in any size clinic in order to help ensure acquisition success.
Before going down the path of using acquisitions to grow or add strategic value to your clinic, it is imperative that you ask yourself three simple but extremely important questions, which will help you decipher if you are ready to make an acquisition.
Will the acquisition(s) create value for your clinic? Simply put, an acquisition should cause your clinic to be worth more, generate more profits or have some competitive advantage upon completion of the acquisition, which in itself increases revenue or profitability.
Does the acquisition target have a corporate culture that is compatible with that of your clinic? Corporate culture is an incredibly important element of any clinic. If the corporate culture of the acquisition target is vastly opposite from that of your clinic, you can expect major challenges integrating the two, expect attrition amongst employees and generally expect to experience far lower performance than expected, which often undermines the financial benefit of the acquisition itself.
Does your clinic have the capacity, in the form of people and time, to integrate the acquisition successfully into the operations and structure of your clinic? You need excess capacity within your clinic in order to effectively integrate the new clinic into that of the existing. If you are already stretched as an organization, it is probable that the integration will create challenges impacting the feasibility of the acquisition while eroding its ability to create value. If the answer is yes to all three of the above questions, then you should continue moving forward with your acquisition objectives. If the answer is no to any one of the questions, I would strongly encourage you to find a new acquisition target and/or in the case of integration capacity, look at adding resources so the integration can be performed well.
Below are some key considerations to be cognitive of before and during the acquisition process.
An acquisition should only be pursued when it creates clear value for the acquirer. Given the fact that acquisitions are: expensive, complex, and take a lot of hard work to make happen; it is imperative that you fully understand why the acquisition makes sense and how it will add value to your clinic. From experience, a quick test of the strategic merit of an acquisition is when it meets two or more of the below criteria.
The acquisition target generates enough profitability to pay back the cost of the acquisition in a reasonable time period, which for a small clinic should not exceed three years.
The acquisition target’s operations are integrated into the acquirer’s existing clinic, thereby creating synergies that can effectively lower costs. Accordingly, the savings from the achieved synergies can pay back the cost of the acquisition in a reasonable time period.
The acquisition target is under-performing, meaning that the clinic has much higher potential than what it is currently achieving and as such is undervalued. Therefore, if for example the acquisition target is doing a quarter of the revenue that they could under a different strategy, acquiring the clinic can be seen as a strategic acquisition, which will deliver large scale value contingent upon successfully executing the strategy.
There are some situations where it can make sense to acquire a clinic when the financial elements of the acquisition do not make immediate sense. In certain situations, where the intent of the acquisition is not financially driven, such as acquiring a company to purchase its intellectual property, gaining some specific customers or perhaps getting the rights to a certain product group; I would caution the acquirer to perform further analysis to truly identify any immediate or long-term financial benefit.
The acquisition target is early on within its life cycle and there is an opportunity to capitalize on its expected growth. Note, that there are other more complex strategic purposes for proceeding with an acquisition, such as tax efficiencies, geographical diversification, and financial restructuring to name a few; however, for the purposes of this article we will not explore such strategies. In summary, due to the significant cost of buying a clinic, it is imperative that you fully understand the dynamics of the acquisition, the strategic merit behind the acquisition, and, specifically, how the acquisition will impact and then be integrated into your existing clinic.
The majority of acquisitions fall through. They fall through for a number of reasons ranging from a disagreement on the purchase price, unacceptable terms, owner involvement issues, to the other party simply backing out, however, the fact remains that the majority of acquisition attempts will never come to a deal being had. In short, it is important to have multiple targets and to be moving forward on several of them simultaneously as the majority will not materialize.
When I refer to ‘acquisition team’, I mean the people and companies you will rely upon to get the acquisition completed. Assuming you don’t have an internal acquisition team, the most important people that you need on your team are your legal counsel, accountants, and any financers you may need to use to pay for the acquisition. Make sure the team is fully briefed on your intentions, so they can move quickly when you come to them with a prospective deal.
Acquisitions aren’t cheap and the financing of an acquisition could be an entire article in its own right; however, I thoroughly recommend that you know your budget, how much of the deal will be paid in cash, whether or not you will need/want to have investors participate in the acquisition for equity, and if any of the deal is to be paid in the form of debt; have the debt instruments arranged prior to approaching any prospective acquisition targets.
From experience, I would recommend keeping the emotion out of the acquisition as it is easy to get caught up in the idea of having new locations, new customers, and more revenue etc., which can cause one to easily overlook facts that could dramatically change the feasibility of the acquisition itself. Use your acquisition team as a sounding board for ideas, thoughts, and concerns regarding the acquisition.
The term due diligence generally refers to an investigation or an audit of a potential investment to confirm the facts, such as financial information and anything deemed material to impact the investment. Utilize your acquisition team to perform the due diligence you will rely upon to determine whether or not the acquisition will add the value you are seeking.
It’s important to recognize that performing adequate due diligence is going to cost you money and, therefore, I would suggest you only agree to perform due diligence once the seller has agreed to give you a period of exclusivity, wherein they cannot allow any other parties to perform due diligence or accept any offers, for a period of 90–120 days.
Unlike buying a house, where the purchase price is relatively easy to identify, the price you pay for a clinic is entirely negotiable and is based on what the clinic is worth to both the buyer and the seller. As a result, clinics typically do not have a clearly defined purchase price and much is up for negotiation.
Herein lays the complexity, often the perceived value by both parties is quite different. For example, the seller of a cosmetic clinic may believe that their clinic has a value of £1,500,000 and the buyer may believe, based on the financial information provided by the seller, that the intrinsic value of the clinic is closer to £1,000,000. Consequently, a £500,000 variance between what the seller and the buyer believes the clinic is worth exists. From experience negotiating acquisitions, purchase price variances occur on the majority of acquisitions, particularly when dealing with owner/operator clinics. So how do you deal with pushback? The answer is in the terms.
The terms and conditions of the acquisition are the most important consideration in order to make an acquisition financially feasible and to ensure success. The terms generally cover all of the elements of the deal, such as when and how money will flow to the seller, whether or not the seller stays involved in the clinic post transaction, what the seller must be able to guarantee the buyer, and any restrictions the seller may have post transaction. From experience, I strongly insist, that above all else and even at the expense of a higher purchase price for the clinic itself, you control the main terms of the deal. Here are some key terms I would recommend insisting upon:
The full price of the clinic is only paid when certain performance related deliverables are achieved (this is typically referred to as an earn-out, because the owner has to earn the full value of the purchase price of the clinic over a period of time). For example, as per the scenario expressed above where a £500,000 variance was evident, you as the acquirer can agree to the variance being paid contingent only when specific performance levels of the clinic are achieved. As a result, the £500,000 more that the acquirer is paying to purchase the clinic could then become financially feasible as the higher levels of company performance otherwise pays for the variance itself.
Similar to the first point, the purchase price is tied to specific performance guarantees from the seller, that if not achieved will discount the purchase price of the clinic. For example, when buying a clinic, you may want to consider the clinics existing customer base and have the seller provide a guarantee that a specific amount of customers will continue to receive treatments for a specific period of time. This is important as the more the clinic is reliant on the owner/operator, the higher the degree of risk that the clinic will not perform at its previous revenue levels due to a high degree of performance specifically correlated to that of the owner.
The acquisition is financed by the seller (typically referred to as vendor financing). Demand to pay for the clinic over a longer period of time so that the initial financial impact to your clinic is decreased. This is particularly important when you are paying for the acquisition with high levels of debt, as vendor financing can dramatically lower borrowing related costs and the impact of debt on your financials while reducing your reliance on third party financers. In addition to decreased costs, vendor financing is typically unsecured and pledged only on the shares being purchased, which is substantially less risky for the acquirer. Admittedly, it may not be easy to convince the seller to finance anything more than 40% of the acquisition, however, any amount should be pursued. Assuming you intend to make the acquisition in cash, demand a discount for prompt payment in cash. Some sellers want to exit a clinic completely when they sell it. Whatever the rationale, which I would question and understand prior to completing the acquisition, negotiate some form of a discount for prompt full payment.
Acquiring a clinic is a long-drawn-out process, which is often largely based on the motivation of the seller. The best clinics to acquire are often those that aren’t for sale and therefore you can expect that it will take anywhere from six months to eighteen months to complete a relatively simple acquisition. Being patient is incredibly important and implicit to getting a deal done in all stages of the acquisition.
Getting to the point of a completed acquisition deal is only half the battle. Where the acquisition will prove to be a win or failure is in how it is managed after its closed. Below are some key considerations for ensuring the success of the acquisition post-closing. Please note however, that managing corporate culture after an acquisition and the integration of the clinic is a very expansive topic, therefore the below is only a brief glimpse on what should be considered.
Expect integrating two corporate cultures, as similar as they may be, will prove to be challenging. It is important to very quickly identify what the culture expectations of the ‘new’ amalgamated organization are and communicate them to all employees. From experience, the majority of culture related issues experienced after acquiring a clinic are due to a lack of understanding from the acquired company employees and a general fear that positions are going to be made redundant, opportunities will cease to exist, and one culture will dominate another. In order to combat these often incorrect assumptions I recommend the following:
Act quickly and decisively. If redundancies are going to happen, act quickly and communicate that no more are expected after they are performed. As Simon Sinek, states in his book Leaders Eat Last, employees need to feel safe in their job to be effective.
Thoroughly communicate why the acquisition occurred, the opportunities it can create, the objectives of the organization, and how this impacts all employees of the clinic.
Thoroughly and quickly communicate the culture of the organization, what that means and what expectations exist for all employees. The employees of the acquired organization need to understand the culture expectations going forward. Doing so can alleviate unknowns and provide culture related expectations that can help employees navigate the new organization.
Similar to the challenges you can expect to face with managing culture differences, integrating the acquired company into that of your own requires diligence, attention to detail and a clearly laid-out strategy. Unfortunately, every acquisition is different so integration of systems, personal, brands, and products is very much acquisition focused and not necessarily universal. One underlying principle I have developed from acquisitions and change management situations is to ensure that any actions made by the company to integrate the clinics are decisive, clearly communicated, understood by the employees, and, most importantly, performed quickly.
After the acquisition and integration is completed, perform a review of what went well and what did not go well. Use this review as a learning tool so you can perform the next acquisition with greater precision and efficiency. In closing, if you use the concepts contained within this article when considering or making your next acquisition, you are more likely to be successful, reduce your purchase price and enjoy the benefits that arise from a well thought out and executed acquisition strategy. Note, that this article was written from the perspective of the acquirer and for some of these individual topics the opposing argument can be made to increase the selling price of the clinic and terms of the deal from a seller’s perspective.