Before diving into the data, understand the industry
Ed Jones, Ph.D., is a clinical psychologist with extensive experience in the clinical and business aspects of healthcare. His areas of expertise include inpatient and outpatient care in mental health and chemical dependency treatment. He has held leadership roles, including division president and chief clinical officer for multi-million dollar organizations such as PacifiCare and ValueOptions, where he was accountable for clinical operations, product development and revenue growth.
Industry experts can help throughout the M&A process, but the most critical and neglected point is often the beginning. Investors should be sure they thoroughly understand the industry they’re targeting before getting into detailed company evaluations.
Early consultation is important so investors can truly understand how any company fits into the overall picture of the industry. As experts, we are well poised to inform investors given our in-depth knowledge of the challenges of a given industry based on our years of first-hand experience as leaders.
For the investor, the goal is to understand the problems within the industry, decide whether the benefits of investing outweigh the risks, and formulate a general plan to address the anticipated liabilities. At that point, the search can begin for targeting companies with more upside than downside potential, and then a deeper dive into the weeds can commence.
I’m consistently impressed with the investors I work with and how they grind through the financial details of companies they might consider for investment. I’m surprised though when some simultaneously ask questions such as, “is this industry basically dishonest?” If you’re already diving into the numbers, it’s too late for that inquiry. These discussions have a greater impact earlier in the cycle of the deal. A full understanding of the industry and its challenges needs to happen much sooner.
As experts, we can help in a variety of ways. In a given industry, perhaps just one-third of the companies are worth investment. Our expert insight can help investors identify those in the top third and avoid the remaining two-thirds.
For some investors, the priority is to find companies that are best in performance, for others its revenue, and for others its profit or value. For other investors, the flip side might be more important—how to find a distressed company that can be transformed into a financial and operational success. Industry experts can help investors find the jewels in the industry based on their goals.
I’ve been involved with the due diligence process to evaluate the strengths and weaknesses of a potential acquisition. I have also enjoyed higher level discussions about the basics of a business before the more detailed due diligence begins. Yet the most important discussions have focused on the strengths and weaknesses of an entire industry, along with ideas on how to address the weakness once a deal is complete.
For me personally, in the last year the substance use treatment industry has dominated most discussions in my field of behavioral healthcare, and I’ve had several talks with investors about this industry.
It’s a complicated industry because we have good treatment approaches for addiction, and yet many programs don’t offer them. It is a complex cottage industry in which an investor can roll up many small companies, and yet differences in the financing and management of these companies can make a larger enterprise lack any real cohesiveness or common direction. These are the types of insights I share as an expert advisor.