AS A SEARCHER, YOU DON'T KNOW WHAT YOU DON'T KNOW (Searchfunder Interview)

SEARCHFUNDER INTERVIEW OF LANI FRITTS, PART I

We talked with Lani Fritts, a Co-Founder and former CEO of Trumpet Behavioral Health. Prior to Trumpet Behavioral Health through a search fund in 2008, Lani served as Vice President of Strategy and Business Development for the Savi Group, a Lockheed Martin Company. He launched and lead a joint venture, Savi Networks, between Hutchison Port Holdings and Savi Technology to deliver enhanced tracking and security systems to the container shipping industry after the 9/11 terror attacks. Lani served on the US Chamber of Commerce Infrastructure Security task force, the World Customs Organization task force on supply chain security, and the ISO committee defining best practices in chain and custody control. During the 1990's, Lani held leadership positions in technology, logistics, and operations for Toys R Us.

This 2-part series covers his search, closing the deal, and his reflections on being a new operator.

In Part I, Lani reflects on their simultaneous acquisition of 2 companies. In part 2, Lani discusses the challenges of being a new operator while integrating the two companies.

PART I: THE SEARCH

What was your search focus?

Our area of focus for the search was general health care services and specialized logistics services. My partner, Chris Miller, had run ResponseLink, a division of Peter Kelly's business, Pacific Pulmonary, prior to our search. As we started looking more deeply into specialized areas of healthcare, we saw the rising diagnostics of autism and the rapidly changing payer situation. Advocacy groups were actively encouraging awareness of autism and were lobbying to change the health insurance coverage to require underwriters to recognize it as a medical condition and seeking reimbursement for behavioral treatment.

When we were doing our search, there were 7 states that had enacted the reform and about 20 more looking at reform.  

We felt legislation would open up this market. If you look at it today, there are 46 states with reimbursement through commercial health insurance.  

Tell us about your search?

We started our search in mid-2008 and closed in mid-2009 on two acquisitions of behavioral health companies located in the Bay Area (Quality Behavior Outcomes and Behavioral Counseling and Research Center), which we then merged to form Trumpet Behavioral Health. 

Did you set out to buy two companies or did two happen along?

We bought two instead of one because there were no providers of any scale or structure in autism services at the time. In order to go after this market, we had to build this platform. We found a deal where we could partner with an owner of a small ABA agency in the East Bay Area who was already in discussions with an owner (who was retiring) in the North Bay about acquiring his business. The first owner did not have the expertise to execute an acquisition on his own. We felt we had the capabilities to do the acquisition.  

In retrospect, I would say it was a mistake to buy two companies at the same time. You don't know what you don't know. Most searchers come in not knowing significant aspects of the business they are buying. Adding the complexity of an integration, while trying to learn a new field and gain the hearts and minds of the employee base, and while explaining to the existing customer base and families who and what you are ---- all added an extra layer of complexity. We realized very soon after our deals closed, we would have to build from the ground up the clinical standards and models and the operations.   

We had to invest a lot more time and money to build a real company. If we had focused on the due diligence of a single company to understand the defensibility of their relationships and recurring revenue, which are good solid ground for searchers, we would have had more insight into how to run such a company. We would have discovered more about the difference between what we took at face value from the sellers and our thin understanding of the services and market versus what we learned later. 

The closing was like to trying to heard cats -- between our investors and 2 different owners and even different legal groups - to get to the close. 

We were naïve about how we would do it.   

Do you think you could have delayed the purchase of one of the companies?

It would not have been feasible to buy one of the companies as it wouldn't have been a big enough enterprise to make it sustainable.  

In hindsight, we perhaps should have taken time to look under other or different rocks. Perhaps, we wouldn't have found it. But a larger platform would have helped us to go acquire the others, if they were still available.   

It set us back a number of years to build the foundation.  

Did you consider doing a start-up in this field?

This area of healthcare is too specialized for a couple of MBAs to go and do on their own. Most of these centers are started by clinicians who found the business and then grow them. You have to have the foundational capability of being able to serve kids. An MBA just going in with a start-up would have had to think about it very differently. It's possible we could have partnered with a strong clinician to do a start-up, but we weren't thinking in that direction at the time.  

We probably should have been more patient to find a more mature or larger platform. Hindsight suggests maybe we should have invested in more time searching.  

We've heard from searchers that sometimes one partner may want to be more aggressive than the other. Were you aligned as partners?

We were aligned on the opportunity in the market and to merge the two companies. We both thought: "The market is very strong." Certainly, the tailwind behind the regulatory reform has aided the space. We were aligned on the plan and what we thought we were going to do.  

One of the benefits of a partnership in a search fund is that one partner can play devil's advocate and uncover some of those potential risks. Perhaps, we did not end up with that benefit because we were so well aligned. We missed some of the challenges we eventually faced on the operational aspects of the integration and the business. We learned a lot once we started to execute.   

On that note, we look forward to presenting Part II of this interview.