M&A in behavioral and mental health can be very complex and face specific challenges to successfully executing a transaction.
Top Reason Why Business Sales Fail
Regulatory Hurdles:
Healthcare deals are subject to extensive regulatory scrutiny and compliance requirements. Failure to obtain necessary approvals from regulatory bodies, such as healthcare authorities or antitrust agencies, can derail a large transaction, while in smaller deals making sure that local governments and organizations and payers and accrediting bodies are all aware of and also ready for the deal to execute can be helpful. Regulatory issues related to licensing, certifications, and compliance with healthcare laws can create significant obstacles.
Financial and Valuation Issues:
Discrepancies in financial statements, inaccurate valuation assessments, or disagreements over price and deal terms can cause M&A deals to fail. A misalignment in valuation expectations between the buyer and the seller can lead to an impasse during negotiations, making it challenging to reach a mutually beneficial agreement. More often than not, I don’t see it come to this, but that both parties still want to get the deal done, they just don’t agree on some of the numbers, usually either due to poorly set expectations, financial jargon and using things like working capital as a negotiating tool, or because someone has slacked and been unsophisticated in their financial reporting or projecting.
Legal and Contractual Challenges:
Legal complications, such as unresolved litigation, undisclosed liabilities, or disputes over contracts, can impede the completion of a deal. Incomplete or inaccurate disclosure of legal and contractual obligations during due diligence can erode trust between parties and create uncertainty, ultimately leading to deal failure. Trust is most important. Disclose and report audits and investigations. Hire well so that you don’t later have to explain issues and pending cases regarding an employee that made poor decisions which you hired and represented your company.
Cultural and Integration Challenges:
M&A transactions require a harmonious integration of two organizations, including aligning cultures, management styles, and operational processes. In the healthcare industry, the presence of differing treatment philosophies, workforce dynamics, and organizational structures can make integration more complex. Failure to address cultural differences and integrate effectively can lead to post-merger challenges and ultimately result in a failed deal. Culture fit is imperative, and quality human capital and leadership in this area can make or break deals.
Due Diligence Discoveries:
Inadequate due diligence can result in unexpected findings that significantly impact the viability of a deal. Uncovering undisclosed financial liabilities, compliance issues, or operational inefficiencies during the due diligence process can erode confidence in the transaction and prompt the buyer to withdraw or renegotiate terms. The process can also make either party distrust or lose confidence in the other’s urgency and attention to detail.
Change in Market Dynamics:
External factors such as shifts in reimbursement policies, regulatory changes, or changes in market conditions can impact the feasibility and value of a healthcare deal. Uncertainty or unfavorable market conditions can lead parties to reevaluate the transaction, delay the deal, or abandon it altogether. I once had a deal in a process that stopped, the buyer pulled out, until the state it was in finished its transition to MCOs paying providers for Medicaid services. An entirely different buyer ended up finishing the purchase a year later.
Integration Planning and Execution:
Inadequate planning and execution of post-merger integration can undermine the success of a healthcare deal. Failure to develop a detailed integration strategy, address employee and stakeholder concerns, and align operational systems and processes can create challenges and disrupt the continuity of services, leading to a failed integration. I cannot stress how important it is for both sides of the deal to develop and have a strong, quality integration plan with contingencies in place.
Lack of Stakeholder Consensus:
M&A transactions often involve multiple stakeholders, including shareholders, board members, employees, and community stakeholders. Differing opinions, resistance to change, or the inability to obtain consensus among these stakeholders can hinder the progress of a deal and make it challenging to reach a successful outcome. This is unfortunate and frustrating. It largely requires strong leadership that can articulate the vision and plan, and quality documentation and materials to show and validate the vision.
Financing and Capital Constraints:
Insufficient access to financing or capital constraints can result in a deal falling through. If the buyer is unable to secure the necessary funds or encounters challenges with financing arrangements, the transaction may be jeopardized. This is an important job for the professional you hire when selling, to vet and hopefully verify that this interested buying party has the necessary funds available and this will not happen. In the current rate environment, this has become an even more serious issue and concern, sometimes lowering valuations.
External Events and Economic Factors:
External events, such as economic downturns, market volatility, or unforeseen events (e.g., pandemics, political instability), can significantly impact the completion of M&A deals. These events may create uncertainty, affect financial markets, and lead parties to reassess their priorities, potentially resulting in deal cancellations or delays. This is out of all of our plans and frustrating, but a good piece of advice is to expect the unexpected, prepare for things out of your control, stick to plans regardless of emotion and current happenings if they get you to your goal.
Don’t Lose Your Opportunity: The Time To Start Working On Your Future Transactions is Now!
It’s important to note that each deal is unique, and multiple factors can contribute to its success or failure. Engaging experienced advisors, conducting thorough due diligence, addressing regulatory requirements, ensuring cultural compatibility, and developing a robust integration plan are key steps to mitigate risks and increase the likelihood of a successful M&A transaction in the behavioral healthcare industry.
