Strategic diligence can have a huge impact on the success of a merger. Here are some ways to implement it.
In recent years, there have been noticeable increases in practice mergers among physician groups. With the ever-evolving reform of the United States health care industry, there is much uncertainty for private practice physicians, and merging with another dermatology practice (with either the same or a different specialty) does offer some advantages.
The decision to buy, sell, or merge a medical practice is complicated, however, and there are many variables to consider, including how to determine a dermatology practice’s worth. Here are some important steps that can help ensure that a merger is successful for everyone involved.
Is the strategic vision for the agreement valid? Physician owners must have a clear rationale for a transaction and truly understand a deal’s impact on their practice’s long-term financial future. Too often, there’s a misguided sense of why the merger should take place, and far too little time is spent defining how the merger enables them to beat competitors and increase organizational value.
For many physician groups, the link between strategy and transaction is broken during due diligence. By focusing strictly on financial, legal, tax, and operations issues, the typical due diligence around a proposed merger fails to test whether the strategic vision for the deal is valid. To do so, dermatologists should bolster the usual financial due diligence with strategic due diligence. They should test conceptual rationale for a deal against more detailed information available to them after signing the letter of intent. Also, they should see if their vision of the future operating model is actually achievable.
When analyzing a practice, looking at historic and current performance is relatively easy. But what about looking into the future? What are the strategic issues ahead? A strategic diligence should explicitly confirm the assets, capabilities, and relationships that make a buyer the best owner of a specific target acquisition. It should bolster the physician owners’ confidence that they are truly an “advantaged buyer” of an asset. Advantaged buyers are typically better than others at applying their established skills to a target’s clinical and business operations. They also employ their privileged assets or management skillset to build on things like a target’s practice reputation, patient experience, or relationships with referring physicians. Naturally, they also turn to their special or unique relationships with vendors and the community to improve performance, leading to advanced synergies that go beyond what is normal.
Seek Mutually Reinforcing Advantages
When change comes suddenly, it can turn strengths into weaknesses and sweep away dreams of success. The aim of a merger should be to achieve mutually reinforcing advantages. Michael Porter1 wrote that competitive advantages stem from how “activities fit and reinforce one another. . . . creating a chain that is as strong as its strongest link.” By undertaking strategic diligence, physician owners will be able to not only define their main objectives, but also gain greater control over the desired direction of the new entity after the merger is complete. Some strategic diligence questions to ponder include:
- What are the strengths of each practice?
- What could our practice be doing better?
- What opportunities exist as a result of this merger?
- What threats do we face by completing this merger?
- What is the current culture of each practice?
As part of the process, you should consider the scope for further growth, efficiency, and improvement. It is critical for physician owners to be honest and thorough when assessing their advantages. Ideally, they develop a fact-based point of view on their beliefs—testing them with anyone responsible for delivering value from the deal, including physicians, physician extenders, clinical staff, and front and back office personnel.
Above all, when it comes to the merger of 2 physician groups, culture is a key decision criterion. Culture should be evaluated and discussed prior to any financial considerations. In my experience, this is of paramount importance for practice-to-practice mergers and is meticulously examined only through strategic diligence. Of course, nothing in the future is certain, but using a strategic and diligent approach provides far greater understanding of the issues ahead and forms another part of the puzzle when assessing a potential dermatology practice merger.
Mr Hernandez is the chief executive officer and founder of ABISA, LLC, a consultancy specializing in solo and small group practice management (www.abisallc.com).
Disclosure: The author reports no relevant financial relationships.
1. Porter ME. What is strategy? Harv Bus Review. November-December 1996:1-21.