© Springer International Publishing Switzerland 2016
Lewis A. Hassell, Michael L. Talbert and Jane Pine Wood (eds.)Pathology Practice Management10.1007/978-3-319-22954-6_99. Practice Sales and Mergers
I Married into the Smith Family; Why Am I Living with the Taylors?
(1)
LambdaX3 International, 4949 South Syracuse St., Suite 300, 80237 Denver, CO, USA
Keywords
MergerPractice structureValuationNegotiationCultureLegal counselPractice salePractice purchaseAcademic practicePrivate practice M&AEmployed pathologistFair market valueReturn on investmentROIGoodwillReputationEBITAOverview
We are all influenced, while growing up, by stories of fictional and real people falling in love, starting a family, and living happily ever after. Ingredients of a happy and successful marriage are transmitted from generation to generation irrespective of culture and ethnicity. Finding the right life partner is an aspiration for most boys and girls around the world; our inherited and acquired social behaviors revolve consciously or unconsciously (one could also say, clumsily or otherwise) around finding and retaining that ideal mate. It is somewhat surprising that the same amount of memory transmission, education, planning, and strategizing is not extended to finding the right business partner or mate considering that most of us spend much more awake time outside the house and away from our family.
Case: Pathology Practice Sales and Mergers Are a Fact of Life
After the moderately intense high school years, competitive college journey, grueling medical school grinder, and specialty and subspecialty residency and fellowship finishing touches, it is time for Saleem to find a “real” job. Similar to finding a mate, criteria of job search happiness and success are considered and interview dances are scheduled. He sets his eyes on an attractive privately owned pathology practice of 12 pathologists, owning and controlling a state-of-the-art multispecialty technical laboratory and enjoying strong contractual relationships with major hospitals and surgery centers, in an attractive metropolitan area with rich urban cultural opportunities and easy access to spectacular outdoor activities. All associates are on a relatively short partnership track and partners wholeheartedly embrace an egalitarian and all-inclusive culture. Through the years, the group has struck a nice work/lifestyle balance and all members enjoy a generous amount of days and weeks off. Saleem brings to the table a subspecialty very much needed by the group with a potential for business growth in areas never seriously explored before by them. In this flirting phase both ask each other all the right questions and each party provides the “right” answers. It is a match made in heaven and the union is consummated 9 months later at the completion of his fellowship year: He has officially joined the happy and thriving Smith family! A couple of years later, while still on a partnership track, the partners are approached by the Taylor family interested in corporate merger. Rumors are flying within the group and his near-idyllic professional situation has the potential to dramatically change. A year later, Saleem finds himself a member of the Smith–Taylor, or Taylor–Smith or Smitay or Taysmit family: Welcome to the world of mergers and acquisitions in pathology!
Pathology Practice Models
Similar to real families, pathology practices come with different models of affiliation, hierarchy, contribution expectations, wealth distribution, succession roadmaps, and other critically important practical and cultural considerations that insure their longevity and success (and occasionally their failure and demise) . Although one does not usually expect a business family to exist as long as a family of blood-related individuals, both types of families share many of the same characteristics of success and failure in given societal and cultural environments.
1)
The academic practice model: The institutional hierarchy is well established at all academic levels . Pathologists are employees of the university or of a university established and controlled professional entity. Salaries are commensurate with academic rank and achievement. Mergers and acquisitions are usually initiated at the institutional level and pathologists, similar to other members of the medical staff, benefit or suffer from the result of such activities without much control of or input into the process or final outcome .
2)
The private practice model
a.
Owned by a group of partners: Pathologists are usually hired on a track leading to partnership and consequent ownership after a number of years that varies from group to group (usually between 3 and 5 years) . Governance of these groups is also variable but usually delegated to a board of directors composed of current partners with or without participation from senior management or membership from successful professionals and leaders recruited from outside the group. Professional and technical relationships with hospitals and other clients are established under the corporate name of the group .
b.
Owned by a sole or duo of proprietors: This model was common many years ago but still exists in some parts of the country. Contracts to provide professional and technical pathology services are specifically assigned to one or two group owners or under the name of corporations entirely owned by them. In this practice model, all pathologists of the group are employees of the owners who make all decisions for the group. The hierarchy of command is rarely in doubt in such practice models.
c.
With or without ownership of a laboratory technical operation: Either models a or b above may include ownership of a technical laboratory operation with various degrees of routine and esoteric complexity .
3)
The hybrid model: Although the majority of pathologists working in academia are employees of the institution, there are also rare examples of privately owned and academically based pathology practices blessed (or burdened) by a hybrid responsibility of business ownership and academic achievement . Their practice model is akin to model 2(a) above.
4)
The hospital or group employed pathologist: Pathologists are often employed by hospitals, hospital systems, or multispecialty groups . In those settings, there is limited independence and the future of the pathologists is tied to the larger entity. Mergers/acquisitions are not uncommon and the pathologists are usually, but not always, incorporated into any new entity .
5)
The big commercial laboratories, with a national presence: These laboratories are usually publically owned and traded . As such, they are led by executive teams with broad experience in the laboratory industry and are staffed by technical and medical professionals with a vast array of specialty and expertise. Although physicians and PhDs assume the directorship of various departments, the executive team and their board of governors unequivocally assume the business governance of these corporations .
6)
The commercial laboratories with a specific area of esoteric expertise: Many of these laboratories are at the start-up stage of their business evolution. Their ownership , staffing, and governance are akin to (5) mentioned above with various opportunities for employees to share in stock options .
Mergers and Acquisitions (M&A)
Although mergers and acquisitions are often mixed in their diminutive M&A denomination, each of these terms brings with it specific meanings with profound legal, practical, cultural, and emotional implications.
Merger
Boiled down to its simplest essence, a merger is a union of two corporate entities that have decided to pursue business as one . Beyond the legal and tax identity unification, it is really the blending and assimilation of cultures between two (or more) distinct organizations that determine the long-term success of that effort .
Acquisition
As the term implies, one organization acquires the properties and assets of another one in this type of transaction. There is a selling and buying process that takes place with the usual resulting relinquishing of governance control to the buyer. Although well understood in the business world, this last point may be difficult to accept in a world of physicians accustomed to owning and controlling their medical practice.
Why Merge/Sell?
Many factors have converged during the past 20 years to encourage physicians, including pathologists, to seek association within larger professional groups:
Ever-increasing complexity of medical specialties and the need for ready access to subspecialists.
The need to improve negotiation and contractual positions with payers and large health-care providers (getting a “seat at the table”).
Economies of scale for technical and professional talents.
Improving purchasing power with suppliers.
Broadening geographic reach and coverage.
Increasing ability to organize care along specialized service lines, with its implications on overall quality of care delivery.
Bettering chances of attracting the brightest and best talents for all levels of the organization (professional and technical staff).
Enhancing deployment of best operational and professional practices to a broader enterprise.
Accessing more capital for better space and equipment.
Initiating and participating in R&D projects.
Engaging in a defensive move in order to neutralize one or more competitors.
Optimists look at an M&A activity and envision positive outcomes that could potentially result from joining forces between two complementary organizations. Pessimists and cynics focus only on the material aspects of that effort, with dollar signs and complex spreadsheets and pro formas dominating the conversation.
Pearl of wisdom: When approached by potential partner organizations, be wary of those that focus predominately or solely on goals of short-term financial rewards (even if substantial), not supported by a vision of gradual growth, quality achievement and excellence in service delivery.
The M&A Journey
Mergers between professional organizations of pathologists can and do happen irrespective of practice size or setting, as long as two or more organizations bring to the table complementary skills and assets capable of building a unified organization that cumulatively brings to the table more positives than the sum of either one of the constituent companies. This is referred to as synergy.
Acquisitions, on the other hand, usually happen between an acquiring organization that has much more financial means and clout than the acquired one, for any number of the reasons enumerated in the paragraph above.
Whether considering a merger or an acquisition, it is safe to compare many of the steps involved in either processes to a (usually) well-orchestrated courting experience between two parties exploring the potential of a long-term union, including:
a.
The initial contact:
Interested parties may approach your organization from all sorts of expected and unexpected sources; be prepared to recognize the subtle and not so subtle signs that may indicate an exploring and/or interested party:
A casually inquisitive conversation at a local or national meeting.
A vendor for a larger organization inquiring whether you had considered a potential association with a competitor to further the growth of a market product (e.g., “would you be willing to work with us on expanding the business of uro-pathology in this market?”).
A national laboratory referring more and more of its local and regional business to your specialists (of course, one could also assume that their national capacity for handling that business has been saturated and/or that local physicians are demanding that their cases be sent to you based on your reputation of service excellence).
Known brokers of laboratory consolidation making a direct inquiry about your intentions for strategic growth.
Direct approaches by well-funded start-up companies searching for a physical laboratory presence (a.k.a., CLIA certificate) for their concept and planned expansion.
Direct inquiry from a competitor on whether “it is time for us to work together and join forces in this crazy world?” (It does not get any clearer than that!)
b.
The first meeting:
The initial signal has been sent (I saw you and I am interested to know you better) and it is now followed by “can we meet?” The meeting can be as casual as having a coffee in house or at an outside facility between a couple of representatives from each organization, or as formal as bringing key players from both organizations to a conference room for structured conversations and presentations. How information is exchanged during these first meetings will be as critical as to what is exchanged. Again, borrowing analogies from the courting process between two human beings, the impact and potential future reward of saying “I like you” is very much dependent on the emotional and situational setting in which that declaration was made.
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