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How to marry two organizations for future growth

October 8, 2014
by Julie Miller
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What is the ideal size of a behavioral health organization? It’s $400 million per year according to David C. Guth, CEO of Centerstone of America, speaking at the Ohio Council meeting in Columbus recently.

“That ideal size is a long-term goal, and nobody is there,” Guth said. “Everybody still has growth potential.”

He also said that organizations will be in a growth mode for a very long time and will likely consider strategic mergers and acquisitions. In time, new entries and niche providers will create added competition in the market. Meanwhile, private equity is now interested in the behavioral health segment, and this week American Addiction Centers completed its initial public offering.

“It’s very difficult to know what healthcare is going to look like in 10 years,” Guth said. “Lots of people are making bets on primary care/behavioral health integration.”

But all in all, he believes many of the business-related and patient-facing activities that an organization does now will be the same a decade from now.

Mergers and affiliations

In the near future, organizations will increasingly look to strengthen their services, differentiate themselves from the competition and position themselves for value. A merger or affiliation might be one way to accomplish the strategy, especially among not-for-profit providers. However, Guth said, the issues that come to light in a “dating relationship” between two entities that are contemplating a “marriage” are distinct for not-for-profits.

“In the for-profit world, they worry about valuation,” he said. “We worry about liabilities. We worry about bad debt, about Medicaid reduction and harassment law suits.”

He recommended that organizations seeking new strategic partners get the word out in the industry to attract potential partners. But also be aware that not every partner that expresses interest will be a fit. In fact, he said, the least advantageous partners are organizations that are similar to each other.

“The more realistic you are when you look in the mirror, the more likely you are to find a suitable partner,” Guth said. “Don’t be shy about organizations that really are complementary.”

When considering complementary partners, a number of practical barriers can hold up the process, but also be aware of:

·         The CEO’s fear of losing his/her role or employment within the organization;

·         The board’s fear of losing control or losing the identity they have worked so hard to create;

·         Overall pride in the current organization and potential grief over losing it.

Guth recommended as part of his “marriage model” for acquisitions that organizations make a point of inviting their most skeptical leaders to the discussion to table because those individuals will ask the most pressing questions and help prepare the two entities for the future as a merged organization. Form a task force and aim for a methodical, iterative buy in between partners.

Once the due diligence seems to be in order, all contracts should be structured to form a permanent union, which will drive the new entity toward full integration, he said. For example, providers shouldn’t agree to exit clauses.

“If you’re so unsure that you need an exit clause, then you’re not ready,” Guth said.

The merging entities should also be prepared to work even harder after the merger is complete. For example, have a systemwide authority matrix to lay out how decisions will be made to avoid confusion. Guth also said some staff members and management might even go through a grief process after a merger. It’s important to recognize it as grief rather than pushback on the new organization.