How Barry Karlin grows CRC Health through acquisitions Featured

8:00pm EDT May 26, 2010

In 1995, when Barry Karlin acquired the initial facility that became CRC Health Corp., he did so with a passion to grow the organization and help people heal.

Over the past 15 years, he has grown the company — which provides specialized behavioral health care treatments to patients, ranging from alcoholism and drug addiction to eating disorders and weight management issues — through a variety of ways, from adding new programs and treatment tracks to simply increasing the number of patients treated. However, acquisitions have also played a key role in its growth. He’s done more than 20 acquisitions at CRC, and he now has more than 140 facilities across the country, which collectively generated $429.6 million in net revenue last year.

“We’ve slowed down dramatically the last couple of years, but we did an acquisition about two years ago,” the co-founder, chairman and CEO says. “We’re now back on the acquisition path right now. Acquisitions have always been a separate element of our growth path, and that will again be the case.”

With that kind of acquisition path, he knows exactly how to successfully complete one.

“When we do acquisitions, we’re looking for great people, a strong referral base and a good reputation,” Karlin says. “Then we add value around that.”

In order to make the best acquisitions, he does his due diligence, communicates the integration plan up front and tolerates cultural differences between facilities.

Do your due diligence

Karlin says the first step in an acquisition process is to learn everything about what you are considering buying.

“Look at all the different facets of the organization,” he says. “You’ve got to analyze the clinical side — does the organization provide good treatment, are they accredited, what is their history of accreditation? … You’ve got to dive deep into the marketing. How do they market? Do they market through salespeople, through the Internet, what’s their referral base? Do a deep dive into operations. On a day-to-day basis … understand their operation detail.”

But it’s not just about the business side. You also have to look at the people because you’re buying a management team, a referral base and a reputation, so do they run the place well? If Karlin doesn’t like the people in the organization, he won’t buy the company.

“Do they have a strong management team?” he says. “What are their holes, strengths and weaknesses? What about the financial side of the equation? What’s the growth potential?”

He also has to make sure that the company is a cultural fit, which is easier said than done.

“Everyone is going to say they have good values, and, of course, it’s easier to write down good values, but the trick is writing down values is one thing, but the question is, ‘Do you live those values?’” Karlin says. “Are those values reflected in everything you say and do on a day-by-day basis?”

So if one of your values is excellence, Karlin then wants to know if you are an excellent facility and how you strive toward excellence.

“I’ll ask the management team, if that’s one of your values, can you give me specific examples of how you actually try to be an excellent organization?” he says. “Give me some examples of how the value of excellence translates into specific things you do in the intake and admissions function or give me an example of how excellence translates into, let’s say, the maintenance function. Can they answer that question? … If they have examples, that’s a terrific sign to me. That’s an indicator that they are doing something to try to translate that value into daily activities.”

After looking at all of these elements, then you can have the right information to make an intelligent decision. If you don’t have experience doing these things, then Karlin suggests enlisting help.

“If you are a smaller company and you don’t have experience in doing acquisitions, you’d be well-served to bring in consultants who are,” he says. “You want to bring in accountants, lawyers, forensics experts.”

In addition to knowing what you’re buying, you have to have a good reason for buying. The why part often trips people up when it comes to acquisitions. Karlin has some tips for determining good and bad reasons for making deals.

“A good reason is, first of all, it offers significant growth potential above and beyond what you would otherwise have — to the extent that it offers growth potential in an arena in which you don’t have that potential, it, of course, translates to strong financials,” he says.

Another good reason is if the acquisition would fill a big gap in your product offering. Or perhaps you need to diversify your product offerings more, and the acquisition would accomplish that goal. In all of these cases, they have to also make economic sense.

But on the other side, there are bad reasons for acquisitions, too.

“It’s incompatible culturally, it has a very different philosophy culturally, but hey, this is not too far from you, in the same state, you have some connections there, and you have the opportunity to buy it, and you buy it,” he says. “But there is no operational synergy or clinical synergy or financial synergy, but you’re buying it so you can have another one. That’s just your ego playing out.

“Another bad reason for buying it is because you’ve convinced yourself that you can save a ton of money and you really don’t prove that out — ‘I now have two facilities, so I can cut my cost structure.’ You don’t prove it out, but you convince yourself you can do it, right? That’s not a good reason.”

Communicate the blueprint

Even after Karlin has done all of his research and made sure that there’s a cultural fit, he then outlines all of the post-acquisition details about how he wants to improve the business before the deal is done.

“When you do your due diligence, a big part of that is developing a blueprint for what you’re going to do after the close, and it’s a great idea to do that in advance of the close so that everyone is on board … [and] everyone already knows what the plan is going forward so there’s no big surprises,” he says. “The worst thing you can do is go blasting in there after the close and implement all kinds of changes, which people don’t like. It’s guaranteed, of course, to hurt morale and antagonize people. It’s much better to be straightforward, upfront, open, honest in advance. … If they’re discussed in advance and there’s an openness about it, people almost always buy in.”

He sits down with the founder or owner and talks about the program’s strengths, weaknesses and how he’s going to work with the acquired party to improve the program.

“No matter how confident either party is that it’s going to work out fine, you want to have a very detailed discussion and talk about expectations post-close,” he says. “That’s the best thing you can do. And do not rationalize to yourself that it’s going to work out OK.”

In addition to detailing the changes to the company after the acquisition, you also want to do the same for the owner or leader’s role, too.

“Go through all expectations that you have for the founder after the dea l is done, and if you’re completely straightforward about that, a couple things will happen, and you’ll learn a great deal from their reaction,” he says. “They will learn a great deal from you because they’re now facing reality about what this thing actually means.”

The reaction can be mixed, but it will help you determine the best way forward. Sometimes the founder will decide he or she doesn’t want to work for a large organization so the founder decides that he will help you with the transition and then he’s done. Sometimes the founder gets nervous and questions whether he or she should do the deal because that person doesn’t want to lose control.

“They might just kill the deal,” he says. “You take some chance that you won’t get to buy what your heart is set on, but you’re much better off that way because if you go forward with the deal, things will go south, you’ll have a difficult time because that founder isn’t ready to make the change.”

Lastly, assuming the founder or owner understands everything and wants to stay on board, you also have to protect yourself and your larger company.

“It’s also important to have a mechanism agreed upon regarding the founder’s role and what would happen if things don’t work out,” Karlin says. “For example, if things don’t work out, you ultimately have to have the right to separate from the founder. If the founder doesn’t work out, you can’t have a situation where the founder has a right to stay on indefinitely or for an infinite period of time, so there has to be a mechanism whereby you have the right to separate from the founder.”

Tolerate cultural differences

If your doctor tells you that you need to have an appendectomy, you’d likely ask him or her to refer a surgeon, and you would likely call that recommended surgeon. Upon talking to that surgeon, you learn that you could have your surgery at one of two hospitals. Hospital A is a little further from your home and you hear that the care there is OK but not great. Hospital B is closer to your home, and you hear that the care there is great, so you choose Hospital B to have your surgery at.

“Not for one second do you say to yourself, ‘Who’s the giant corporation headquartered in New York that actually owns Hospital B?’” Karlin says “That didn’t even occur to you. All you thought about is the quality of care. You were focused on the quality of treatment by the surgeon, and does this hospital provide good quality care?”

Because that’s typically the focus for most patients when deciding upon a health care facility, Karlin doesn’t look to make everything the same as the larger CRC organization after he does an acquisition.

“The important thing is don’t go in there and say, ‘Everything you learned, I want you to forget about — we’re going to show you the right way to do things,’ because all you’ll do is you will destroy the very thing you paid for in the first place,” he says.

Instead, he says that CRC is accepting and embracing of cultural differences between facilities.

“What we don’t do is try to force every organization to have the same culture as the parent organization,” Karlin says. “We have honesty as an overall corporate culture, but we have a very high tolerance for nuances in culture, and that’s been crucial for us in acquisitions because people like to sell to us because they know that we’re not going to go blasting in there and try to shift the culture in a fundamental way. If the culture is completely different than ours and is incompatible, then we won’t buy in the first place.”

For example, Karlin says that some smaller facilities have more of a laissez-faire approach to things because that’s how the founders have been. In that situation, he would need to shift the culture a little bit to be more focused on accountability and responsibility, so he’ll put in place mechanisms for assuring true accountability in the staff. Another example is switching financial systems because all of the CRC facilities need to be on the same system.

On the other hand, perhaps a facility has a clinical approach that none of the other CRC facilities has taken, so it’s somewhat different, but it has proven effective. As long as it’s scientifically proven and meets his quality standards, he’s inclined to not mess with changing it.

“We might say, ‘Hey, it’s working, it’s helping people, we can see the outcomes, let’s leave it alone,’” he says. “Why change that? Why coerce them into changing what they do clinically that’s working well for their patients? There’s an example of an area that we have high tolerance. Now, if they’re doing some witch-doctor things, that’s different, but we wouldn’t buy them in the first place.”

Another example of tolerating differences comes in the name of the facility. While most leaders are quick to change the name of the acquired organization, Karlin takes the opposite approach and leaves the name as-is.

“I’m a huge believer in legacy,” he says. “ … Legacy is the quality; it’s the essence of the facility. You see, most facilities were founded by individuals, right? Not giant corporations. … The very essence of that facility is vested in the founders and has a lot to do with the culture.”

Instead, he takes a multibranding approach, so when you walk into the facility, in large letters on the wall, you’ll see the primary name of that business. But then in smaller letters underneath the original name, it will say, “A member of the CRC Health Group.” Karlin likens it to a car customer purchasing a Lexus.

“The brand you’re buying is Lexus, but you also know it’s ultimately owned by Toyota, so you get the benefit of both,” he says. “Same with us. The brand is the facility, which I preserve, but ultimately, there is a company called CRC behind that, which assures continuity and stability and assures that there are plenty of resources to make certain that that facility does things right.”

How to reach: CRC Health Group Inc., (877) 637-6237 or www.crchealth.com