Michelle Davis, president of Healthwise Consultants, discusses the human side of the deal and how physician owners can best prepare emotionally for a sale.
Question: Several sessions at this meeting have touched on the business side of the sale—how to evaluate and execute the sale of your center or practice. However, there is a human side as well. What qualities in a partner should ASC owners look out for?
Michelle Davis: The term partner needs to be clearly defined. It is my understanding that there is never an equal partnership, one entity usually owns at least 1% more and therefore has ultimate decision making power.
When considering the human element of a deal the important thing to remember is that if humans are involved there are multiple risks to the deal. Be aware that at every stage of the process, in every area of the transaction humans are involved.
There are so many variables that one must consider that the true answer is the consultant's fall back answer of "it depends." A great deal of specific information must be known about a situation, and the specific individuals involved, to apply social science, psychological and behavioral models in a meaningful way.
Most people are capable of conducting themselves rationally in many circumstances, however, cognitive biases and/or behavioral traits may not be consistently observed in the behavior and decisions of a single individual especially when faced with emotionally charged circumstances such as an M&A deal presents. Said another way, while an individual may have a usual response under normal circumstances, when faced with emotionally challenging circumstances, such as considering the sale of one's business it is more challenging to accurately predict the behavioral response. This impacts judgment and decision making profoundly at a time when being rational is imperative. Deals are negotiated by lawyers, bankers, many other business professionals, there are multiple people involved in deliberations; there are many conflicts of interest and differences in incentives from various individuals. This will impact and possibly distort each individual's judgment and decision making. Reading purchase agreements and going through dense financial documents most likely will produce a stress response.
It is important to remember that these emotions in response to the deal and the impending changes are present in almost every relevant stakeholder in the M&A process from the above mentioned business professionals toy our employees, vendors, patients/customers, shareholders, referral sources, payers, etc. This most likely will be stressful in your personal life as there will likely be additional changes. Even things perceived as positive can be stressful; such as what to do with a big check? Opinions could vary, even within your own household, resulting in stress.
After you have done the pre-active planning work of determining that being acquired is the correct step in your succession plan. Look for communication red flags, early in the process of assessing a potential entity to acquire you; this is also similar to what an acquiring organization should do with a potential target. During these early interactions be mindful so that you begin to notice elements of the communication style of the other company, and maybe begin to determine some of the potential flashpoints that might arise in areas such as: decision making approaches and styles; how is power and authority created; who has it; who bestows it; organizational structure (formal vs. informal, access, etc.); meeting process; work habits; what counts in performance management metrics; time or clock speed of getting things done. In order to understand your own company's culture it would be ideal if you have performed your own internal cultural assessments as part of your preparation to become available for acquisition to help you determine more clearly what types of potential companies might be the best fit for your company.
While a formal cultural assessment, or cultural due diligence, isn't really possible or even necessary at this early stage, there are many things that one can pay attention to that can provide a lot of information to help determine if you want to proceed with this organization as a potential match. This "attending to additional information" is a skill many physicians already have and use with patients in their clinical settings. For example, a patient presents and reports an issue and then clinicians do their tests, etc., during this time the clinician is also assessing non-verbal communication, appearance, psychosocial impairment issues, etc., to ascertain a more comprehensive picture of the patient's situation. The skill of attending to what is/isn't being said, by whom, and how information is communicated is useful to take note of in early discussions.
This is a time to try to gain an understanding of the buyer's strategy for growth, acquisition hungriness, acquisition justification and motivation. Basically, try to understand why are you a good target? What do you have that they want? Try to ensure that everyone is on the same page about why the deal is being done.
Q: What are the potential pitfalls during these transactions?
MD: One of the most critical and often overlooked element of a deal is to care for the emotional well-being of the business owner. There are so many emotions that will arise as a result of the loss of control you will experience while you move through the stages of letting go of your business. This business has been your baby, you've likely spent numerous late or sleepless nights nurturing it through challenging times and now you will turn it over to someone else and step away. You will most likely have questions such as; will the new owners care for my business, employees and customers the same way? What will my position be? How will I be valued? What will they change? It would be very unlikely to find someone who has built a successful business who does not have some attachment to that business.
It is likely that your role will change into that of senior manager, shareholder, or possibly non-existent. You may be expected to still be a public face or leader of the company but without the responsibility, or decision making power you previously had. You will have a shift between the freedom and control elements of your professional and personal life. Previously you may have had all the control in your business, and as such, all the responsibility, in the new co-arrangement you may have less responsibility, i.e., greater freedom from responsibility, but less control.
When considering how much of one's identity comes from the groups we are members of and the various roles we play in our lives. Your identity may be strongly connected with your business in that you are almost like one entity in. That will change. The way you view yourself will change and the way others perceive you such as employees, family, friends and your community may change. Your relationships with customers or suppliers may change. All this change is emotional. Humans don't really like change, it is stressful, and stress can impact the behavior of humans. It is easy to see how transactions such as selling/buying a business are among the most stressful.
Be aware of the BIG LIES in M&A, mainly:
“We won’t change anything”
“This will be business as usual”
“You will be a completely autonomous, stand-alone division”
“This will be a merger of equals”
“We will make all integration decisions on objective data”
“We will get back to you on that”
Be realistic. There will be changes, ideally, in order to increase value. When your smaller company is acquired the larger company may not be open to adopting the target company values, systems, etc. Don't expect things will stay the same in your smaller company. Inevitably, there will be some; even if they are small changes, there will be changes. All employees may not benefit from the transaction. Decision making of buying company may not make sense.
Q: What makes a good and bad transaction?
MD: It is impossible to really know if something was a good or bad deal at closing because integration has not yet occurred. With so many deals not meeting their value targets due to improper integration the true test of a "good or bad" deal is evident in how well, or poorly, the company is doing 12, 18, 24 months, etc., out.
Remember that at closing the negotiations may be concluded, and several players involved up to this point will be exiting the scene, the truth is, the real work begins, not ends on closing day. Best practice goal is not to erode value by more than 10 percent, a dip should be anticipated around key dates such as announcement date and closing date, but should not be indicative of value lost, that requires a longer range analysis of data.
The stress of change does not end at signing and closing. Often the individual who was acquired but stayed on in a newly defined role may be in more emotional distress post-closing. The realization that you are accountable to new people, this responsibility may be more stressful and cause a former owner to work harder because s/he does not want to disappoint anyone. This additional stress to perform along with the reality that one cannot easily make decisions or problem solve in the previous ways can be extremely frustrating. While the arrangement of having an owner who knows the business and is used to giving so much energy to the business is great for the buyer, but may not be in the best interest of the seller. It is difficult to go from being your own boss to working for someone else. Many individuals who sell their business suffer from a sort of post-sale depression that can be likened to a post-partum depression. The emotional processing has also been compared to the grief one might experience in a death: anger, sadness, and the need to redefine oneself with a new identity no longer attached something else.
Q: Are there warning signs physicians should look out for before signing on the dotted line?
MD: “Failing to understand where the value resides in what is being bought at therefore integrating incorrectly has caused some of the biggest disasters in M&A History.” Clayton Christenson, new M&A handbook.
It is important to note than consistently statistics show that more than 50 percent of post-merger integrations fail, and this is determined by a devaluation of the target company. Most of the top 5 reasons for unsuccessful integration come down to the human/cultural elements: failure to understand the cultures and determine best practice via data driven decision making.
Make sure you’ve asked about their previous integrations. Integration is not consolidation. How many successful integrations, examples, have they done 20 deals and integrated them identically? Remember unique deal DNA…or have they done 20 unique deals? What is their integration budget, and plan? Who will be the ONE person that is focused and responsible for appropriate/successful integration? Look out for values and strategic intent that is not aligned values. Understanding this will help to combat value erosion such as; loss of people, marketing/sales, productivity, focus, and IT complexity issues. Beware problem solving that is like a kids soccer game, when you notice a pattern of fixing things as they pop up instead of with pre-active planning, this type of approach is not likely to improve during post-close integration activities that are imperative to a successful outcome of the deal.
Q: How can physicians take the first step and position succession planning to smooth the transition? Should they retire or stay involved after the sale?
MD: Finding a buyer for your company is not the first step in the process of selling your business. Preparing yourself and your business for the sale is truly the first step. The first steps in planning a sale should be to do one’s own realistic, personal, cultural, and organizational, assessment, answering fundamental strategic planning questions thoroughly. The process of selling a business requires stamina as it is a deeply involved process that requires sustained attention. Negotiations are not quick and dirty, which runs counter to integration post-close which needs to be for maximum effectiveness.
Where are we now?
Strengths, weaknesses, opportunities, threats (SWOT).
Many owners feel they have a comprehensive understanding of their business. Learning how individuals outside of the owner and his/her inner circle perceive the organization can highlight important facts that can impact, marketing, sales, and projects designed to improve business, and ultimately increase value. Doing an organizational culture assessment would be beneficial as a part of this process.
Taking a good look at ones SWOT from a personal perspective can give valuable insight into personality, judgment, decision making, emotional responses, biases, etc. that can impact the decisions made in succession planning.
Where do we want to be?
SWOT analysis is used to prioritize tasks, and develop methodical, and realistic approaches that will lead to success in meeting objectives.
Having awareness that organizational resources are often limited is important at this step. This requires one to be mindful of cognitive biases that may be present in leader's decision making, especially, for business processes that may be outside of their expertise. Creating a three to five year long term plan based on the analysis can also allow the owner time to carefully plan for changes to his/her life post-sale and to increase knowledge about the M&A process, and put together the best team, all of this pre-active planning will increase value and decrease risk at the time of a deal. During this time the owner should intentionally work toward being a more passive leader by making sure the business runs in a systematic way that can be relatable and teachable to other individuals and making sure you have defined operational leadership to someone other than yourself. The process of stepping away should be gradual and will make the process of transitioning away from being a business owner easier on everyone involved.
On a personal level, be clear about the ideal outcome for you. Do you want to stay in the company? Do you want a continued stake in ownership? What do you want to happen after the sale? Knowing your personal goals will make the owner/target/seller more comfortable and will also make the buyer more comfortable.
How do we get there?
Every company has its own DNA, just as every deal has its own deal DNA, the process of answering the first two questions in the SWOT analysis will inform the response to the third question.
Think about and be clear about the answers you want to get. Don’t wait to put together a team of M&A advisors, lawyers, accountants, coaches, therapists, etc., to assist in the organizational, cultural, and personal challenges that may arise during a deal. Allow yourself time to plan the process of working through this personally, and organizationally will provide great insight and value.
References:
Cultural Issues in Mergers and Acquistions (Working paper). (2009). Deloitte.
Key Findings from The State of M&A Survey Integration Effectiveness (Report). (2018). M&A Partners.
Langevoort, Donald, C., 2011 The Behavioral Economics of Mergers and Acquisitions. http://scholarship.law.georgetown.edu/facpub/438
Seo, M., & Hill, N. S. (2005). Understanding the Human Side of Merger and Acquisition. The Journal of Applied Behavioral Science, 41(4), 422-443. doi:10.1177/0021886305281902