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Hospital CEO Shares Best Practices From a Community Hospital Sale

On May 17, 2011, Avanti Hospitals in El Segundo, Calif., purchased Coast Plaza Hospital in Norwalk, Calif. The deal culminated after a year of negotiations and due diligence. Craig Garner, JD, Coast Plaza's former CEO, was serving as CEO during the transaction and pursued the deal to ensure the hospital's future in the community.

According to Mr. Garner, the transaction process with Avanti Hospitals was his second investigation into transaction opportunities. He had considered a transaction earlier in his tenure due to changing conditions in the healthcare environment. "The hospital was in such a place that I knew it was going to need a partner eventually. With change in Medicare and the introduction of value based purchasing, I knew there may come a point where hospitals would need to team up with others to reduce expenses and leverage scale," says Mr. Garner.

Coast Plaza Hospital's transaction illustrates the issues and challenges that continue to confront hospitals in the current healthcare environment. Here, Mr. Garner discusses his goals for the hospital's sale, the partner selection process and best practices he learned through the experience.

Transaction goals
According to Mr. Garner, his major goal for the transaction was ensuring the future of Coast Plaza Hospital and its employees. "I was patient in my investigation of transaction opportunities because I wanted to make sure the community kept its hospital and that 400 employees kept their jobs. It was a 50-year old hospital. I didn't want to see the community lose it," says Mr. Garner.

Mr. Garner knew that the hospital would need a partner and didn't want it to run into financial problems where a "fire sale" was necessary. "I was not interested in rushing through a sale. I wanted to do it on [the hospital's] terms or at least on mutually agreeable terms with the partner," he says.

Selecting a partner
Mr. Garner's partnership search was atypical since the first potential partner he met with became the final partner. He intended to find a partner that understood the community hospital model and was committed to running the hospital as such in the future.

"It just so happened that we entered into an exclusivity period in the very beginning. It was an off-market kind of sale, just by chance," says Mr. Garner. "I had a feeling that [Avanti Hospitals] understood the idea of a community hospital. I believed they would do the right thing."

3 tips for the transaction process

While the partnership search happened faster than some might expect, the negotiation and due diligence period was just as stringent as any other. Here, Mr. Garner shares best practices from the process.  

1. Enact a confidentiality agreement. Mr. Garner was especially attuned to the confidentiality of the deal because he did not want to mislead employees or physicians about sale rumors. If confidentiality is desired, he recommends a clear agreement in the very beginning of the process to ensure the deal is developed before it is shared publicly.

"The confidentiality agreement was important to me because I didn't want to be forced to answer to someone who asked if I was selling the hospital," says Mr. Garner. "[One thing to remember,] is that the confidentiality agreement itself is far less important than the individuals involved. Mistakes happen. In this case, it was successful because we kept [the negotiations] contained."

The group of Coast Plaza representatives included approximately five people. According to Mr. Garner, the small number of people discussing the deal was useful to ensure that Coast Plaza's employees and physicians did not hear rumors.

2. Write a detailed letter of intent. According to Mr. Garner, it is important to emphasize detail in the letter of intent in the beginning of transaction discussions.

"Even though it may not be binding, it provides an outline of the transaction. If you are dealing with individuals who honor their word, they will use it as a template for developing the deal," says Mr. Garner.

For instance, the letter of intent between Coast Plaza Hospital and Avanti Hospitals included:

• Acquisition structure (asset versus stock purchase or merger)
• Parties to agreement
• Assets and liabilities to be purchased and excluded
• Regulatory considerations
• Valuation
• Payment terms
• Confidentiality
• Diligence

3. Ask for and allow full disclosure during due diligence. According to Mr. Garner, the due diligence between Coast Plaza and Avanti Hospitals went by very quickly because the work group was small and efficient. Although there were a couple of phases of due diligence — initial diligence prior to the letter of intent, from LOI to definitive agreements and from definitive agreements to close — the process was streamlined by cooperation from both sides.

Avanti Hospitals' diligence requests were more substantial than Coast Plaza's. For example, Avanti requested information on Coast Plaza's financials, corporate organizational documents, employees and ERISA, third-party vendors, real and leased property, tax and environmental compliance, intellectual property, inventory and joint ventures, to name a few. Coast Plaza diligence focused primarily on information relating to the financial viability of Avanti and its retained liabilities.

Mr. Garner's willingness to respond to all of the requests for information about Coast Plaza helped the deal conclude successfully. "I wanted to make sure that we made all disclosures. I wanted to do this only once, and do it right," says Mr. Garner.

Although every hospital and health system is different, other executives can take the lessons Mr. Garner learned to inform choices in their potential transactions. Affiliations, mergers, acquisitions and sales can be complicated, lengthy processes, especially when one entity is a community hospital. In order to avoid common pitfalls, learning from others' experiences is crucial.

More Articles on Community Hospitals & Transactions:

6 Strategies for Community Hospitals to Remain Viable
4 Tips for Hospital Merger & Acquisition Success
4 Emerging Models Provide Strategy Roadmap for Future Transactions

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