Do your due diligence
Karlin says the first step in an acquisition process is to learn everything about what you are considering buying.
“Look at all the different facets of the organization,” he says. “You’ve got to analyze the clinical side — does the organization provide good treatment, are they accredited, what is their history of accreditation? … You’ve got to dive deep into the marketing. How do they market? Do they market through salespeople, through the Internet, what’s their referral base? Do a deep dive into operations. On a day-to-day basis … understand their operation detail.”
But it’s not just about the business side. You also have to look at the people because you’re buying a management team, a referral base and a reputation, so do they run the place well? If Karlin doesn’t like the people in the organization, he won’t buy the company.
“Do they have a strong management team?” he says. “What are their holes, strengths and weaknesses? What about the financial side of the equation? What’s the growth potential?”
He also has to make sure that the company is a cultural fit, which is easier said than done.
“Everyone is going to say they have good values, and, of course, it’s easier to write down good values, but the trick is writing down values is one thing, but the question is, ‘Do you live those values?’” Karlin says. “Are those values reflected in everything you say and do on a day-by-day basis?”
So if one of your values is excellence, Karlin then wants to know if you are an excellent facility and how you strive toward excellence.
“I’ll ask the management team, if that’s one of your values, can you give me specific examples of how you actually try to be an excellent organization?” he says. “Give me some examples of how the value of excellence translates into specific things you do in the intake and admissions function or give me an example of how excellence translates into, let’s say, the maintenance function. Can they answer that question? … If they have examples, that’s a terrific sign to me. That’s an indicator that they are doing something to try to translate that value into daily activities.”
After looking at all of these elements, then you can have the right information to make an intelligent decision. If you don’t have experience doing these things, then Karlin suggests enlisting help.
“If you are a smaller company and you don’t have experience in doing acquisitions, you’d be well-served to bring in consultants who are,” he says. “You want to bring in accountants, lawyers, forensics experts.”
In addition to knowing what you’re buying, you have to have a good reason for buying. The why part often trips people up when it comes to acquisitions. Karlin has some tips for determining good and bad reasons for making deals.
“A good reason is, first of all, it offers significant growth potential above and beyond what you would otherwise have — to the extent that it offers growth potential in an arena in which you don’t have that potential, it, of course, translates to strong financials,” he says.
Another good reason is if the acquisition would fill a big gap in your product offering. Or perhaps you need to diversify your product offerings more, and the acquisition would accomplish that goal. In all of these cases, they have to also make economic sense.
But on the other side, there are bad reasons for acquisitions, too.
“It’s incompatible culturally, it has a very different philosophy culturally, but hey, this is not too far from you, in the same state, you have some connections there, and you have the opportunity to buy it, and you buy it,” he says. “But there is no operational synergy or clinical synergy or financial synergy, but you’re buying it so you can have another one. That’s just your ego playing out.
“Another bad reason for buying it is because you’ve convinced yourself that you can save a ton of money and you really don’t prove that out — ‘I now have two facilities, so I can cut my cost structure.’ You don’t prove it out, but you convince yourself you can do it, right? That’s not a good reason.”
