The practice scene in Australia is changing rapidly, therefore practice owners need to be aware of strategic opportunities, so that the practice can continue to move forward with the industry (if you are not going forward, you are going backwards!). One of the options open to some practices is a practice merger with a near neighbour. So, when is a merger a good way to go, and what are the advantages of the strategy?
With corporate and other groups acquiring practices across the country at a rapid rate, time is running out for some smaller, privately-run practices to stay in the game and compete. So which are the best practices to merge and what are the advantages? The smaller the practice, the more vulnerable they are to competition (they often lack the resources to compete effectively for market share, and can be less profitable than larger practices due to the lack of economies of scale to drive down costs). Hence, we see businesses worldwide looking to expand to raise barriers and to compete effectively – veterinary practices are no different.
Practice mergers can occur in both the city and the country so, regardless of location, there are some critical factors that make this strategy more likely to succeed:
- Geographically, the two practices should (ideally) share some adjacent territory.
- The sum of the two practices should exceed their individual resources on the following:
- Client accessibility
- Service offering and the ability to semi-specialise
- Return on investment
- The two merging practices should be a good ‘culture’ fit.
In addition to the above-mentioned benefits, a practice merger will open up career opportunities for employees, provide economies of scale over many aspects of practice (e.g., equipment, inventories,
staff costs, purchases – the list goes on!)
Typically (but not exclusively), practices in country towns are good candidates for mergers where there may be two or three practices drawing from the same catchment area. Better to join forces and enjoy all the benefits of a larger practice, than to continue to compete against each other for the same sized pie.
What can go wrong?
Some mergers either fail or do not live up to expectations if insufficient due diligence (or research) was not done at the beginning, leaving the parties with the feeling that ‘it seemed like a good idea at the time!’
Many merger failures are due to a lack of culture fit between practices. For the solution, we must look to leadership here – good leadership can make or break the deal with respect to merging two practice cultures. Culture involves not only the people, but also the structures and procedures (‘the way we do things’) in each practice.
Failure to discard old habits or fix lingering problems can also compromise a merger – again, this comes back to leadership, to identify and eradicate poor business practices inherent in the previous un-merged businesses. Needless to say, in preparing for a merger, it is essential for each practice to eradicate/minimise as many business problems as possible, before moving forward into a larger entity.
Three Phases of a Merger
There are commonly three phases associated with a business merger. The first phase is the concept phase – here, the principals of the practices involved must meet to firstly explore the concept of a merger, then define the benefits and, lastly, develop a plan. Once the decision has been made to proceed, professional business advisors need to be involved. Accounting, legal and management advice should be sought by each party, in order to steer a course through a minefield of ‘merger issues’.
Although third party professionals can sometimes get in the way of the enthusiasm of a good idea, there have been many mergers that have fallen over at the start because the right business advice was not sought initially.
The second phase is the negotiation phase – again, professional advice should be sought here too. Practice valuations will need to be performed, then equity shares will need to be apportioned to the owners of both entities. A new corporate structure will need to be established in order for the merged entity to go forward – these are all tasks which should be handled by the appropriate professional.
The third phase is the integration phase – this is where the ‘rubber hits the road’ with regards to getting down to business and trading as the new entity. In this phase, the new team members get to work together and establish the new culture. It is often a time of great change, which some team members will embrace (new leaders may emerge) and others will decide that the new structure is not for them. Again, the need for professional help in the form of HR advisors may be required in this phase, to assist in the integration process and to minimise collateral damage. Good leadership is vital in this bedding down phase – most team members can cope with change, provided they are led well from the top.
Once the merger has taken place, hopefully the merged entity can look forward to better use of resources, economies of scale, higher returns and a more secure succession plan for the owners, more professional satisfaction for all team members, improved job security and, not to forget who makes all this possible, an improved service for customers and their animals.