5 Key Ingredients for a Successful Startup

Physician entrepreneurs need know-how and a strategic vision to run a company. They also need to know what they don’t know so they can fill those critical knowledge gaps. I work with many physician entrepreneurs with great ideas who want them to come to fruition. These physicians are often curious as to what would make their startup successful. You could argue that many ingredients go into a successful startup, and luck is undoubtedly one of them. However, there are additional elements that are necessary for success. Here are five critical elements that are sometimes missing when beginning a startup:

No strategy

Unfortunately, most startups—like many medical practices—do not have a strategy even though many claim they do. Rather, these physician entrepreneurs often have mission statements or goals. For example: “Our strategic goal is to grow 20 percent per year in revenues and profits over the next five years.” These are not strategies; these are aspirational goals or wish lists. A strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a significant challenge or opportunity. A strategy should be described very simply, often with an analogy or metaphor. Arriving at this succinct conclusion, however, takes many hours of work.

No evidence-based business model

Sometimes a startup will have a “business plan” that describes the company and how it plans to reach target numbers in their five-year financial pro forma. Problem is, this narrative consists mostly of assumptions and judgment calls. Business models should first start with the idea (solution and opportunity).  Models should then show how each critical element of the business ecosystem works together with all the other elements to achieve repeatable, sustainable sales. Each significant assumption needs to be tested and verified so potential investors are confident of the startup’s success.

No compelling story

In my experience, very few physician entrepreneurs know how to craft and tailor their story to all of their audiences. Telling your story includes infographics, presentations, and most importantly, answering questions. A standard one-size-fits-all presentation does not work. Every audience has different levels of experience, expertise, and interests. I find most of the pitches are presentations with a text-filled slide deck and a rambling list of product features. They don’t show the bigger picture or how their idea will solve a problem. A persuasive story must take people from Point A (uninformed or skeptical) to Point B (knowledgeable and committed). The story must also be filled with benefits that relate to the specific persons addressed.

No fundraising plan

Most physician entrepreneurs leave fundraising until the end of the development process. Raising funds is hard work and takes lots of time away from nurturing the business. But, you have to start early and identify when you will need additional funds, how and from whom you are going to raise these funds, and outline a process to reach your goals. It is challenging to “sell” investors on a high-risk venture. It is better to get investors involved as early as possible and let them “sell themselves” along the way.

No CEO

A critical component in the company’s success can be attributed to the CEO and the leadership team. For many investors, the CEO and team’s capabilities are the first, and often most important criterion, they evaluate. Founders with a great idea are not automatically great CEO’s. It takes a person with vision, know-how, focus, and a growth mindset.  The CEO must have the ability to make decisions under stress and uncertainty, and know how to keep score (revenues and profits). A great CEO knows the development phases of the business and is able to adjust herself and the team to meet the challenges of each phase. A talented CEO and team determine the success of the company.

These five elements are important, but by no means the only ingredients. Just as in baking, a successful startup requires careful calculations, precise measurements, and fine tuning. With the right guidance and structured thought process, physician entrepreneurs can run their existing medical practice and also nurture that next budding idea that they have.

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6 Areas to Consider When Conducting Valuations

Have you ever wondered what your practice looks like to physicians looking to join or to potential acquirers?

If you had to look at a number of physician practices and determine which practice has the best prospects for the future, could you pick it?

Although the methodologies for different-sized practices vary, the principles are the same. When outsiders evaluate your practice for an acquisition, one element they consider are potential synergies between the practices. The value proposition may be greater when practices combine because of increased market strength, cost advantages, complementary services and/or increased service offerings, or extended geographic range.

The value proposition depends on whether you are an investor, acquirer, or employee. Some characteristics of an attractive practice include: a high return on equity, sustainable and consistent growth in revenues and earnings, growth and size of market value, market leadership, service offerings aligned with patient needs and wants, and changing to stay at the forefront of the market. It is helpful to do a valuation as part of the analysis of a practice. Valuations can be done when selling a practice to investors, merging with another group, or when adding/removing a physician partner.

That being said, valuations change over time and not all acquisitions are a good deal. Here is some guidance for how practice owners can view their practices as outsiders and questions for physicians to ask as they contemplate joining a practice, especially as a future partner.

There are three basic approaches to valuations:

  • Income– There are several different income methodologies, with discounted cash flows being the most common. This approach considers expected income and risk adjusted returns.
  • Market– Revenue or earnings before interest, tax, depreciation and amortization (EBITDA) multiples of comparable practices may be used along with adjustments for risk or particular strengths of a practice.
  • Asset– This approach attempts to get a picture of business value by viewing the practice as a combination of assets and liabilities. It is based on the economic principle of substitution, which examines the cost to create a similar business that can produce the same economic benefit or utility.

Aside from the formulaic approach of a valuation, there are many quantitative and qualitative factors to consider when evaluating a practice. Some factors will be more dominant than others. To determine the weightings, you must have an understanding of the medical specialty and critical success factors of practices within that specialty. In addition, it is important to determine what is relevant and what is not.

Here are six areas to evaluate the prospects of a physician practice:

1. Competitive

  • What is the size of the market?
  • Is the market growing, maturing or declining?
  • What is the impact of technology and social trends on the market?

2. Competitive landscape

  • Is it a highly fragmented market or are there one or more dominant practices?
  • What are competitors’ strengths and weaknesses?

3. Market positioning

  • What are the practice’s strengths and weaknesses?
  • Is it a market leader?
  • What is the practice’s market share compared to its competitors?
  • What are its competitive advantages?

4. Operations

  • Are the business and clinical processes effective and efficient?
  • Are there any issues in the physician governance?
  • Are there concerns with any of the offered services?

5. Strategy

  • Is the practice growing through acquisitions or organically?
  • Are the marketing plans effective?
  • Are the operational strategies effective?

6. Practice management

  • In a small practice, the effectiveness of the management team can be evaluated more readily than in a large practice. Understanding the culture and effectiveness, as well as any shortfalls, of the management team is critical.
  • As the economic and market factors change, how does management react to the changes? For instance, a decline in revenues may occur because of market or economic conditions. Does management react in a way that helps the practice remain profitable and still postured for future growth? Cutting expenses is a great short-term solution that can have detrimental long-term consequences if not done properly.
  • Is management being rewarded only on short-term results or are there long-term incentives in place?
  • Does the practice’s culture contribute to growth and value maximization?
  • Do they respond to patient needs effectively?

When evaluating your practice, go beyond the historical growth rates. You need to see how changes in the market and business environment will affect the practice. As a result, you will be evaluating a number of internal and external factors that affect the entire physician practice. Look at how the practice responds to changes in patient needs, market trends, and technology. Determine if your practice is agile and able to change its course when necessary. If not, is this a red flag with regards to physician governance.

Valuations can be done at any time and are a useful way to see the bigger picture. It’s always a good idea to assess your practice, look at the competition, attract new talent, and improve patient care. At the end of the day, employees and investors want to know if your practice is a winner both now and in the future.

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Physician Group Post-Merger Integration

Closing the deal is a major milestone, but it’s the post-merger integration process where the real value is created. It may be difficult to believe, but the post-merger integration can be even more complicated than the deal itself. Communication is critical during the post-merger integration process, and the two groups need to share documents easily. Information must be transitioned seamlessly throughout and the whole integration process has to meet physician owners’ expectations for key timelines and capturing synergies in growth and costs.

Conducting post-merger integration at a high speed is one of the most critical elements to a deal’s success. Taking proactive action within the first 100 days post-closing can significantly realize deal synergies. Practice administrators working in concert with a seasoned consultant must develop a well-structured plan for their post-merger integration efforts to vastly improve their odds for a successful outcome.

The complexities of integration

Many physician owners spend months of time and effort closing merger transactions but stumble when it comes to integration. Oftentimes, buyers significantly underestimate the level of involvement in a successful integration effort. Common mistakes include:

  • Failing to properly assess the resources to integrate and operate two businesses
  • Not addressing “people issues” and cultural differences of the physician groups
  • Losing focus after the signing of a deal
  • Not acting promptly, allowing key personnel to leave both organizations
  • Overloading management with integration responsibilities outside their scope of expertise

These mistakes lead to a lack of synergies and a significantly slower integration effort. This lack of speed during integration tends to compound the mistakes.

Speed is of the essence

Physician groups that move slowly during the integration process are vulnerable both financially and competitively. The announcement of a merger between two groups creates uncertainty among employees of both organizations and fuels anxiety-filled discussions about who will stay and who will be let go. Without proactive and effective communications, employee morale will suffer. Even worse, those key employees that you hope to keep may jump ship to competitors or other organizations.

The turbulence of an announced merger can give competitors a perfect opportunity to call on your referring physicians and even patients. The community at large can spread all kinds of unconfirmed “alternative facts.” A slow response to retention initiatives (retention of employees, patients, and referring physicians) during a merger can leave competitive doors open too wide for too long. Decision-making must be streamlined for the integration effort to move forward. The completion of a few “quick win” integration tasks will bolster confidence in the team leadership and keep the process moving forward. For example, one of the first things to accomplish is a staff meeting to discuss key human resource issues such as payroll schedule and benefits transition.

A plan of action

Strategic integration decisions should be put in place prior to the completion of due diligence because these strategic decisions may influence the deal terms and structure. It’s important to identify these details and include them into the deal agreement before closing. Ideally, a 100-day integration plan is implemented when the deal closes. This should include identifying tasks to be completed, known issues, milestones, and planned timelines for completion.

Following the deal’s closing, detailed planning sessions should begin with functional department members of both practices. In the beginning stages, joint meetings are essential to establish relationships between representatives of both practices. Once initial on-site discussions are completed, subsequent discussions leveraging virtual meeting technology can take place. The two together will result in more efficient time utilization and reduced travel costs.

If you think of a physician group merger as a marriage, then you can see there is still a lot of work left to do after the wedding date, or day 1. Yes, it’s the day in, day out effort of the marriage that takes patience and thoughtfulness—and also tends to get messy. Compared to a marriage, the wedding is easy. Post-merger integration is critical to realizing the value of a deal. It’s also highly complex, taking place under severe time pressure, and happens in parallel to running the core business—making it one of the most challenging initiatives physician owners and practice administrators will ever undertake.

What’s the secret to post-merger integration success? Focus on the strategic objectives of the deal, accelerate synergies, and build a high-performance medical practice.

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Contact ABISA for healthcare consultancy support or speaking engagements.

Women and Healthcare

The Women’s Heart Alliance surveyed over 1,000 women, ages 25 to 60, to learn about barriers and opportunities regarding cardiovascular disease. Per the Journal of the American College of Cardiology (2017;70(2):123-32), the survey revealed:

  • 45% of the women were unaware that cardiovascular disease is the leading cause of death in women
  • 71% of the respondents indicated they had almost never raised the issue of heart health with physicians

Here are some other noteworthy statistics regarding women and healthcare:

  • 80% of healthcare decisions are made by women (Fast Company, Apr 13, 2015)
  • 77% of surveyed women say they don’t do what they know they should do to stay healthy; 62% claim they just don’t have the time (The Power of the Purse: Engaging Women Decision Makers for Healthy Outcomes)
  • 70%-80% of all consumer purchasing is driven by women (Forbes, Jan. 21, 2015)
  • 43% of surveyed women passed a health literacy quiz (The Power of the Purse: Engaging Women Decision Makers for Healthy Outcomes)
  • 35% of surveyed women don’t fully trust their physician (Harvard Business Review, May 28, 2015)

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Understanding Valuations

Valuation nomenclature has changed over the years. Practice values used to be referred to as a percentage of collections, but today’s most common reference point is a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). Traditionally, a solo practitioner thought of earnings as the total remuneration from the business in a given year. The reality, however, was that a portion of those earnings was compensation for the physician providing clinical care, and a portion represented profit generated from the business. Historically, valuations were largely considered the total earnings of the owner, whereas investors focus on the profits of the business as a basis for valuation. Further, investors consider the actual cash flow of the practice on a debt-free basis as the best predictor of their return on investment. This has led to the focus on EBITDA as a measure of a practice’s performance, and this is how most other businesses are valued.

What is the right multiple?

There is no easy answer to that question because the multiple is meant to assess the opportunity of the investment and its relative riskiness as well as provide a reasonable rate of return for investors. There are many factors that influence multiples, including location, trained staff, stable or growing revenue stream, payor mix, condition of the facility, mix of services, patient demographics, and profitability.

For group practices, although having a pipeline for future growth is important, the most significant influence on the multiple is historical growth. It is also important to recognize that the higher multiples are applied to those businesses that have a qualified management team in place to support continued growth and ensure replicable earnings, as well as documented policies and procedures to scale the business.

Business owners often focus exclusively on the multiple and don’t recognize that equally as important as the multiple is the number the multiple is being applied to – the EBITDA. The traditional valuation of a solo practitioner’s office is based on historical performance of the business as a predictor of future performance. The typical adjustments applied to the historical financials are to: 1) bring owner compensation to fair market value, and 2) account for nonrecurring and discretionary expenses.

In contrast, the valuation of a group practice is typically done on a prospective basis, which involves forecasting the performance of the business, in addition to making adjustments for owner compensation, nonrecurring expenses, and discretionary expenses. The purpose of forecasting for group practices is to help a prospective investor see the true investment opportunity, which may not be reflected in the historical financial performance. For example, if a group acquired a practice partway through a given year, the historical financials only reflect that partial additional impact on revenue and EBITDA. The EBITDA adjustment in this example is to show the prospective investor the impact of the acquisition for a full year.

The other nuance in today’s marketplace is the different perspective on earnings from different types of buyers. A private equity firm is generally looking to make an investment in a business or partner with the founder of the business and therefore will want to keep as many members of the management teams in place as possible to operate the business and drive performance. However, they may make a downward EBITDA adjustment if they feel additional management team members are needed to continue to grow and support the business.

Conversely, strategic buyers (those who have existing group practices and experience in the industry) may make upward EBITDA adjustments for synergies, including duplicative management team members or third-party vendors, more favorable lab and supply contracts, and more favorable payor contracts. Generally speaking, a private equity firm will likely pay a higher multiple but on a lower EBITDA, whereas a strategic buyer will likely pay a lower multiple on a higher EBITDA.

If you are considering a transition, aside from the valuation of your business, it is critical to understand the other terms necessary to close a transaction. In many cases, there are legal provisions that can have significant economic consequences and therefore should be considered when looking at the “value” of the business. Using an experienced consultant will ensure that you negotiate the best price and transaction terms for your given situation.

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How To Study Your Medical Practice Competition

No matter how new or old your medical practice is, it is important to identify your competitors and evaluate their strategies to determine their strengths and weaknesses relative to those of your own. Understanding the competition is a crucial business activity for any physician owner. Some practices hire professionals to track competitors and assess the competitive landscape on a regular basis. But it doesn’t always have to be a complicated, time-consuming, and expensive process—particularly given the new wealth of data that can be assembled using the internet. By investing even a small amount of time, physician practices of any size can develop a framework for making competitive assessments, gather intelligence on rivals, and understand how to position their own brand, services, and practice in the community. Not only can you learn best practices from competitors, but you can also learn to avoid the mistakes they make. I often tell physicians that keeping track of who your competitors are, what patients and referring physicians are saying about them, and what they are saying themselves can help you differentiate your practice and stay ahead of trends that could impact your business. Staying smart on the competitive landscape helps you make very practical decisions around what services you offer, who you hire, what your messaging is, and where you fit in the brand landscape.

Benefits of competitive research

Conducting a competitive assessment should be an ongoing process, one in which you continue to deepen your understanding of the strengths and weaknesses of your competitors. There are a series of business benefits you can gain by having insight into the competitive landscape. The following are potential business benefits from conducting competitive research:

  • Understanding your catchment area (this is the geographical area from which your practice draws patients)
  • Better targeting patients
  • Forecasting the potential for your catchment area
  • Figuring out how local forces (economic and political) impact your specialty and even your catchment area
  • Understanding what competitors are offering
  • Determining offerings in ancillary services
  • Finding new patients

A competitive analysis is a critical part of the marketing plan for your medical practice. With this evaluation, you can establish what makes your practice unique, and therefore what attributes you play up in order to attract your target market (patients and referring physicians).

Analyzing your catchment area

Evaluate your competitors by placing them in strategic groups according to how directly they compete for a share of the patients within your catchment area. For each competitor, list their providers and services, their estimated profitability, growth pattern, marketing objectives and assumptions, current and past strategies, organizational and cost structure, strengths and weaknesses, and size (in patient volume) of the competitor’s business. Answer questions such as:

  • Who are your competitors?
  • What services do they offer and/or what equipment do they have?
  • What is each competitor’s market share?
  • What are their past strategies?
  • What are their current strategies?
  • What types of media are used to market their practice (their physicians, their services, and their equipment)?
  • What are each competitor’s strengths and weaknesses?
  • What potential threats do your competitors pose?
  • What potential opportunities do they make available for you?

A quick and easy way to compare your physicians or services with similar ones in your market is to make a competition grid. Down the left side of a piece of paper, write the names the physician groups that compete with yours. To help you generate this list, think of where your patients would go for care if you were not around. Across the top of the paper, list the main features and characteristics of each practice. Include such things as target market, providers, size, relationship with referring physicians, and patient volume. You may also want to list services offered, strength of their marketing efforts, and other features that are relevant. A glance at the competition grid will help you see where your physician group fits in your particular catchment area.

Impact of properly understanding the competition

Gaps in our knowledge of the competition are a natural and unavoidable characteristic of operating within the healthcare industry. We must remember though that a competent study of the competition can help reduce some of that uncertainty and help pave the way for strategic planning and business operations within your practice.

Physician owners must be keenly aware of what competing practices are doing. Practice management requires a firm focus on the competition; identifying its strengths and vulnerabilities is crucial. Since managing a successful practice requires decision and action based on situational awareness, identification of your competition’s expectations and preparations is important. Because the healthcare landscape is changing so rapidly, accurate and timely information regarding what competing practices are doing is a prerequisite for success.

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Announcing the launch of our new website

We’re excited to announce that our new and refreshed website is live at www.abisallc.com.  Our goal with this new designed website is to create a user-friendly browsing experience for our trusted and valued clients.  The updated site includes changes to navigation, with dropdown menus for both mobile and desktop versions. We’ve also improved the structure of our content, so you’ll get more from a quick read. There’s a whole host of smaller but impactful changes, all to make your experience of the ABISA site that much better for you.

website

We are sure that in the new website you will find all the information that you need.  For any questions, suggestions, feedback or comments, please Contact Us.