The recent uptick of hospitals looking to merge, sell, or reposition their facilities doesn't come as a surprise. The economic downturn has forced hospitals across the country to reconsider new futures for their institutions. Hospitals that struggle financially are looking to merge or sell. Normally, viable options include merging with a bigger hospital or non-profit that can take them under their bigger and much more financially stable wings. Another viable option is for the facility to sell to a for-profit hospital operator. Ken Doran, CPA, and Will Moore, CPA, who are partners with Franklin, Tenn.-based Health Spectrum Partners, have been involved with more than 70 hospital transactions dealing mainly with non-profit acute-care hospitals being acquired by for-profit hospital operators. They offer some key considerations for any hospital looking to merge or sell their respective facilities.
Act as early as possible. Many financially struggling hospitals fail to understand that as operations begin to falter, there needs to be a greater sense of urgency to fix the problems at hand. "If they don't have quality earnings and positive/strong cash flow then they can't easily support maintenance of plant and equipment or new technology or quality initiatives, so they continue backing into a corner," Mr. Moore says. Without strong cash flow, the facility is not capable of investing in future growth initiatives.
Put your best foot forward. Like anything else in life, the best thing to do when it comes to marketing and selling a product or service is to put an emphasis on the best aspects. If the hospital has a great track record for patient satisfaction or has a superb corporate identity, make those the selling points. The organization must work to shore up deficiencies in their operation and begin to strengthen the organization.
Some things may require change. Traditionally, buyers did not assume pension plan liabilities when it comes to unfunded or underfunded pension plans, but times have changed. Buyers are considering all liabilities now, including expensive pension plans.
Stay on the same page. "When merging two hospitals, there needs to be a certain degree of alignment in terms of services, strategies, fundamental mission statements and so on," Mr. Doran says. Mergers are very difficult to execute because traditionally one management team will be chosen as the "surviving management team," and the other management team frequently depart as the point of merger. This single point is the reason that most hospital mergers fail.
Consider every option. Two hospitals looking to merge will undoubtedly want to do so with the aim of creating a stronger entity together. Look for a merger opportunity that will help expand and create better future opportunities for growth and success for your hospital.
Determine which entity will have a predominant role. "I've seen this happen so many times: When transactions happen, people start to leave and one of two facilities will have to take on a predominant role. Who takes charge?" Mr. Doran says.
Cover all the basics. From a non-profit perspective, the very core, mission and strategy has to be considered. What community does it want to serve? What services do they want to provide? Would the acquisition fit within the non-profit system's mission and core?
Make sure it's a sound investment. From a for-profit standpoint, the main consideration is whether acquiring another facility will increase value to shareholders and increase potential to make money. If a facility is not currently profitable, a for-profit acquirer must at a minimum understand the potential for operational improvement in order to move forward with a prospective deal. Any transaction must be accretive to the organization's earnings.
Know exactly what you are getting into. "In some transactions, the board [of the hospital being acquired] may want to ensure certain deal points of consideration, and the proprietor will need to decide if it's something they can deal with or if it's something they need to walk away from," Mr. Moore says. "It may simply relate to health services provided, such as clinical outreach. The caveat to a transaction could be maintaining that service, even though it may not specifically mean more money for the proprietor."
Learn more about Spectrum Health Partners.
Selling a facility
Act as early as possible. Many financially struggling hospitals fail to understand that as operations begin to falter, there needs to be a greater sense of urgency to fix the problems at hand. "If they don't have quality earnings and positive/strong cash flow then they can't easily support maintenance of plant and equipment or new technology or quality initiatives, so they continue backing into a corner," Mr. Moore says. Without strong cash flow, the facility is not capable of investing in future growth initiatives.
Put your best foot forward. Like anything else in life, the best thing to do when it comes to marketing and selling a product or service is to put an emphasis on the best aspects. If the hospital has a great track record for patient satisfaction or has a superb corporate identity, make those the selling points. The organization must work to shore up deficiencies in their operation and begin to strengthen the organization.
Some things may require change. Traditionally, buyers did not assume pension plan liabilities when it comes to unfunded or underfunded pension plans, but times have changed. Buyers are considering all liabilities now, including expensive pension plans.
Merging two facilities
Stay on the same page. "When merging two hospitals, there needs to be a certain degree of alignment in terms of services, strategies, fundamental mission statements and so on," Mr. Doran says. Mergers are very difficult to execute because traditionally one management team will be chosen as the "surviving management team," and the other management team frequently depart as the point of merger. This single point is the reason that most hospital mergers fail.
Consider every option. Two hospitals looking to merge will undoubtedly want to do so with the aim of creating a stronger entity together. Look for a merger opportunity that will help expand and create better future opportunities for growth and success for your hospital.
Determine which entity will have a predominant role. "I've seen this happen so many times: When transactions happen, people start to leave and one of two facilities will have to take on a predominant role. Who takes charge?" Mr. Doran says.
Acquiring another facility
Cover all the basics. From a non-profit perspective, the very core, mission and strategy has to be considered. What community does it want to serve? What services do they want to provide? Would the acquisition fit within the non-profit system's mission and core?
Make sure it's a sound investment. From a for-profit standpoint, the main consideration is whether acquiring another facility will increase value to shareholders and increase potential to make money. If a facility is not currently profitable, a for-profit acquirer must at a minimum understand the potential for operational improvement in order to move forward with a prospective deal. Any transaction must be accretive to the organization's earnings.
Know exactly what you are getting into. "In some transactions, the board [of the hospital being acquired] may want to ensure certain deal points of consideration, and the proprietor will need to decide if it's something they can deal with or if it's something they need to walk away from," Mr. Moore says. "It may simply relate to health services provided, such as clinical outreach. The caveat to a transaction could be maintaining that service, even though it may not specifically mean more money for the proprietor."
Learn more about Spectrum Health Partners.