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| Robert S. Goodman |
With all good intentions, many of us have started a business that we believe has the ingredients of success:
- a great location;
- the right equipment;
- a wonderful, differentiating marketing and sales strategy;
- a staff of people (partners included) who have terrific attitudes;
- a hook to bring business through the door;
- enough money to get started and take us through the first critical months as business ramps up and cash revenues begin to roll in.
Unfortunately, the road to good intentions is littered with business failures, health care business failures included. In the past several years, I have observed a marked increase in health care outpatient business failures. These businesses often appeared to have many of the elements noted above, as well as a solid strategic reason to exist and the necessary financial underpinnings—and many of them did succeed. Unfortunately, in the cases of those that failed, something clearly went awry—and most of the time, more than one thing.
The goal of this article is to discuss a subject that is generally not talked about openly or frequently—outpatient health care business failures—how to avoid them, how to see them coming, how to assess the situation, what can go wrong, and what to do when faced with a business failure.
HOW TO AVOID BUSINESS FAILURES
“Out of clutter, find simplicity.”—Albert Einstein
If a business has all of the above-mentioned ingredients of success, please point me in that direction so I can make an equity investment.
It is easy to recite the right ingredients to make your business work, but it is not easy to execute them. To ensure that you really have the elements of success, research your concept, get sign-off from your attorneys, make sure you understand the demographics in the service area you have identified, and be certain that referring physicians will send you patients or, at least, give you a try—if you can lock in those referrals in a legal fashion, even better. Due diligence, research, and many hours of time spent discussing your concept with users and payors will pay off in the long run.
A monumentally key ingredient to developing your business strategy and seeing if it works is to not be emotionally tied to it. That will hurt you. For the most part, the problem with “seeing it coming” is that you simply cannot imagine that you are going to fail: “Not me; it’s unimaginable.” It is important to remain emotionally uninvolved (very hard to do) when the warning signs appear: when your cash is starting to run low; when referrals are not coming as quickly as you like; and when the leading payors in the market are ignoring you
Keep a clear head and realize you have a problem.
HOW TO ASSESS YOUR SITUATION
“From discord, find harmony.”—Albert Einstein
It starts with not sleeping well or getting a very funny feeling in the pit of your stomach. This is when it is important to find a place where you can be alone and be brutally honest with yourself. Advisors should be called on to help assess the situation, including partners, lawyers, accountants, referral sources, friends, spouses, and even staff members. Get help, no matter what it takes. Sometimes, even a lender can be an advocate, although everyone’s first instinct is not to tell them anything. A lender can restructure the debt repayment program to make it easier for you to meet your near-term cash needs, especially if you are open with them. The last thing they want to see is a creditor go out of business and then have to either bring someone else in or pull out the equipment and sell it on the open market. You are their best chance for a full payout of their money and they do generally know that.
What can go wrong?
Have you run out of cash? Cash is always king. You have heard that before, and it is never more true as you start your business or as you try to grow your business. You need to have a stash to keep the wolf at bay—if you do not, the wolf will huff and puff and blow you away.
Do you have the right partners? They can in fact be part of your salvation: rewrite your debt structure, give you better repayment terms, help you develop and execute a new business strategy, and be there to help with some key decision-making. They need to be included as part of the solution and not viewed as part of the problem. The problems are likely not them and/or not caused by them. To the extent that any of these people or other enterprises are part of the problem, then you need to decide to end that relationship or modify it severely.
Did you hire the right people? Do you have the right partners, can you rely on them in a pinch, have they done their jobs to the best of their abilities, have you allowed them to do that, and are you keeping them informed of your situation? Again, these people can be a source of strength and a remarkable resource for you.
Are you keeping your customers happy? Referring physicians want timely, friendly, and accurate service for their patients and for themselves. They do not want patients waiting inordinately long periods of time for service, and they do not want to wait very long for results to be reported back to them. Keep the referring physicians happy and you will keep your flow of patients. If you don’t, you already know what the result is going to be.
Do you understand the strengths and weaknesses of the competition? Competition can be one of your biggest threats or one of your biggest allies. If you understand your competition and their strengths and weaknesses, then you can determine how you can differentiate yourself in the marketplace. If you underestimate them and assume that your ego will overcome, then you may have a problem looming in your future. Competitors come in several forms as providers of services similar to what you are offering—hospitals, physician groups, and business people (both physicians and nonphysicians). Just know who and what you are dealing (or are going to deal) with, and make sure you understand how you can withstand a competitive threat from any one or more of them. Never underestimate a competitor.
Is your business model attractive to payors? Payors are always key to any good business strategy in the outpatient health care sector. Recent attempts by payors, and state and national government sources, to limit the continuation and proliferation of outpatient providers in my region include:
- New Jersey has a 3.5% ambulatory care tax on collected revenues that it has levied on a number of specific nonhospital-owned outpatient providers, including diagnostic imaging (MRI, CT, and PET or PET/CT), ambulatory surgery centers, physical therapy facilities, and sleep centers.
- In Pennsylvania, two of the major third-party payors are restricting or denying provider contracts to single-modality facilities, forcing some businesses to rethink their futures and others to reconsider new projects and opportunities altogether.
Understand all constituencies, how they act together, how they can hurt you, and what you can do about it. Sometimes, deciding to pull out and take your licks is the best strategy to employ.
WHEN THINGS GO WRONG
“In the middle of difficulty, lies opportunity.”—Albert Einstein
Little debt and lots of cash on hand buy much more time and opportunity to do something to reverse a problem scenario. If you are short of cash and leveraged pretty highly, the options are much more limited and a conversation with your lender is advisable.
Some lenders will work with you and some will not. Those you have not communicated with will not trust you or your ability to reverse a tailspin. Those lenders that understand business issues and business problems will be helpful, to some extent, even if you have not fully communicated with them. They will try to understand your problem(s) and what your plans are to rectify them, and recognize their role. They will (or usually will) restructure your debt by allowing lower payments, or even skip payments, for a period of time, although there could well be a price to pay for that: a higher interest rate or a tighter structure on guaranties, and some, although it is rare, may even want to take an equity position in your business. Typical lenders, like banks, captive finance companies, and most third-party lenders, will not do that. There are, however, mezzanine finance companies that take risk and in exchange tend to command higher rates, sometimes a preferred return, and an equity position. But at least they are willing to work with you.
The ones that will not work with you will “play hardball” and try to force you to take actions that are not always in your best interest, like notifying you that they are coming to take your equipment.
Outside assistance can be very helpful and can come in a variety of forms, an equity investor, the sale of your company (likely on a distressed basis) to another similar company, and a consulting firm with operational and financial expertise to help you with a turnaround.
- Equity investors can range from “friends and family” (usually you go to them at the start of a business and not when you are in a distressed mode), “angel investors” (wealthy individuals), and venture capital firms (if the opportunity is big enough and offers something special). Mezzanine finance firms generally steer clear of turnaround situations, but you might as well ask—the worst that can happen is they say “no thanks” and who knows, they may have an idea or a connection that might be helpful.
- A strategic buyer (one who is in the same business) may smell an opportunity and wish to get involved if they can buy a base of business that might be a strategic fit for their existing business. They might even recognize your personal abilities and want to keep you on board with them after the acquisition. That could well be true of your other associates. Good people are hard to come by, and just because you may have had a business failure does not make you a bad person or someone who is not worthwhile. On the contrary, someone who has been through the wars of a failed business generally knows much better what to look for and how to prevent it in the future. A smart strategic partner will see that and seek it out. This would be true of a “financial buyer” as well. They look like equity investors, but they will take control of the business in virtually every way
If you can take stock of your situation, gain some concessions from your lenders and creditors, do what needs to be done to shore up your volume shortfalls, gain acceptance as a provider from the yet-to-be-signed third-party payors in the areas that are important to you, and do whatever else you need to do to fix the problems you have, that will go a long way toward achieving a turnaround for your situation. If you can do it without outside assistance (beyond your lawyer and your accountant), so much the better. The point is, action is required and it is important to take the lead. If you do not, the consequences will be very clear and unpleasant for you.
Robert S. Goodman is the founder and managing partner of The Mansfield Group, LLC, a health care advisory firm specializing in outpatient care; www.mansfield-group.com and .
