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Don't Roll-Over For Roll-Ups

Don't Roll-Over For Roll-Ups
Tom J. Northey, Mike Fisher, MBA
July 12, 2000
This article, and those to follow within this series, address multiple components of the business structure of your audiology practice.

You have likely heard the terms ''merger'', ''acquisition'', ''joint venture'', ''vertical'' and ''horizontal integration'' and ''takeover''. Additionally, there has been a proliferation across all industries from a new breed of broker referred to as a ''consolidator''. We will discuss these terms and their relationship to the profession of audiology below.

To begin with, a few definitions are in order:

Merger - A merger occurs when two business entities of similar size and venerability decide to join forces to optimize the market advantage of each entity. A recent exception to this is venerable Time-Warner's merger with newcomer AOL. There may be a bit of Gestalt occurring here where the sum is greater than, or at least different from, the contributing parts. The blending of two business cultures is a major challenge even with small firms where the respective owners have historically had autocratic control over the business which they incubated and nurtured for so many years. Merger is likely not an alternative when a publicly traded company and a relatively small, privately held, clinic negotiate.

Acquisitions - An acquisition is when one business entity purchases another business entity. It would seem intuitive that the larger firm would purchase the smaller firm. However, we have seen occasions when the mouse conquers the lion. In the audiology industry, the larger firm will typically be the buyer, resulting in the larger firm acquiring the smaller firm.

Joint Venture - A joint venture occurs when two firms join together, yet each retains their unique ownership. Instead, each firm contributes human and financial capital in pursuit of a single venture or project. For example, an Audiologist and an Optometrist with existing clinics decide to own and operate an Ear and Eye Clinic. Each underwrites a portion of the start-up capital and continuing operational expenses. They may become equal owners in this third entity. However, the Ear and Eye Clinic will not materially modify the legal or cultural structure of their core businesses.

Horizontal Integration -This occurs with the expansion of the core business by inclusion of other businesses with similar market orientation. For example, suppose Audiology Clinic A is located in the center of town. It has the desire to expand its market service area by purchasing the existing Audiology Clinic B on the south side and Audiology Clinic C on the north side of town. Audiology Clinic A is expanding horizontally along a single ''plane'' within its current product/service mix.

Vertical Integration-This occurs with the expansion of the market orientation beyond the existing core business, resulting from the acquisition of other businesses along the ''value chain''. For example, Audiology Clinic A may have offered audiometric testing as it's exclusive product for a number of years. It is now evident that fitting, dispensing, and repairing hearing aids are necessary to stay abreast of local competition and financially sustain their corporation. Audiology Clinic A is expanding along a vertical plane by offering different but related services and products.

Takeovers -Takeovers are a special case acquisition. Just the term ''takeover'' seems to denote unwillingness by the seller to sell. This type of transaction is more desirable for a buyer searching for a seller's vulnerability. The purchase price may have little to do with fair market value and much to do with poor strategic planning. The seller may suffer from chronically inadequate cash flow, poor market position, poor use of assets, or a general loss of focus. And the takeover ''artist'' will thoroughly exploit every one of the seller's weaknesses.

Consolidators have developed their own nomenclature to describe their principal functions: ''Roll-ups'', ''Build-ups'' ''Buy-and-Build'', and ''Poof'' companies. In general, consolidators raise venture capital for the purpose of quickly purchasing or ''rolling-up'' small businesses with similar market orientations. Consolidators often claim ''economies of scale'' as their rationale. Specifically, rather than having many individual offices each performing the same administrative tasks (purchasing, book-keeping, billing, marketing, advertising, accounting, etc.) with variable levels of efficiency, a consolidated system allows these functions to occur in a centralized location and manner, yielding greater efficiencies. For instance, consolidated practices have more purchasing power (i.e., better discounts based on larger volume of units purchased), less employees performing location-specific redundant tasks, greater marketing and advertising efforts at less cost per office. The net effect theoretically is less overall expense and higher efficiencies, all based on economies of scale.

Historically, within our profession, a senior audiologist might develop a transition strategy with a younger audiologist leading to a multi-year buyout of an existing practice. The senior audiologist would slowly relinquish his/her practice while his new partner's practice grew. The multi-year buyout provided a revenue stream for the senior audiologist without placing too heavy a financial burden on the younger professional. This remains a viable alternative requiring two willing parties with similar practice philosophies and patterns.

However, before making any life/business altering decisions, the audiologist should be aware of, and well versed in, other options available for transitioning the audiologist's greatest financial asset.

Successful transactions are familiar to us all through the media. These transactions stimulate the price of stock upward and often add considerable cash to the coffers of dealmakers, market makers and senior managers.

Although failures may drive stock prices down, it is important to consider, who is hurt by the transaction? In extreme cases, senior manager(s) are dismissed. But often, they have previously negotiated sizable golden parachutes in pre-arranged severance packages. The dealmaker has already been paid their commission and is well on their way to the next deal. Market makers are experts at timing their buys and sells of share offerings and are likely not hurt financially.

Smaller shareholders may suffer but only the imprudent variety will risk a major portion of their portfolio on a single offering. There is always a risk when you invest monies in stock.

Of course, there is one more very important participant in this transaction---the sole proprietor of an audiology practice---the person sitting on the opposite side of the expensive mahogany table in the corporate giant's board room---the individual who has developed a finely-tuned service for the community after years and decades of education, toil, pride and passion. This individual has only one opportunity to convert this wonderful asset-the audiology practice-to a legacy of continued quality service to the community while providing financial security for the seller. One opportunity only---no golden parachutes, no commissions based on the size of the deal, no profits from insider information---only the proceeds from the sale of ''the practice''.

How does the audiologist position him/herself in this milieu? Corporate giants use whatever mechanism best satisfies the market's insatiable desire for growth. Some arrangements work best in specific situations, others do not. In general there are identifiable trends, but each situation is different and requires careful and well thought out analysis. How does an audiologist begin to assess the correct time and price for the sale of a practice? What are the components of a ''practice valuation''? How might a practice owner enhance the value of his or her business?

These questions and others will be addressed in future Audiology Online articles within this series. For more information on this and related topics, please contact Tom Northey MSM or Mike Fisher MBA at Audiology Economics. The phone number is 303-761-7600 extension 14.
Sennheiser Hearing - June 2024

Tom J. Northey

Mike Fisher, MBA

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