THE MARATHON BEGINS ON ACQUISITION DAY (Searchfunder Interview)

SEARCHFUNDER INTERVIEW OF LANI FRITTS, PART II

We talked with Lani Fritts, a Co-Founder and CEO of Trumpet Behavioral Health. We previously covered the search and decision to purchase two entities in PART I. In this part, we chat with Lani about their transition to operator. 

PART II: BECOMING AN OPERATOR 

Talk about the transition? 

The owner that we partnered with stayed on board. The older owners exited fairly quickly. This ended up being part of the challenge. The owner that stayed on ended up not filling the role we expected. We needed him to be the clinical leader. What he really wanted to do was business development. He did not want to be that clinical, visible, mission-driven leader. The role definition became an issue relatively quickly. Thus, we were in discussions about replacing him and making a key hire for a clinical director fairly early on. It was impossible for us as MBAs to fulfill that role. From day 1, we were focusing on the foundational, almost existential, aspects of the business rather than improving and growing.

Do you feel that you had good communication with the owner pre-closing or did things change for him post-closing? 

We had very good communication with the owners before the closing. I'm not sure that things changed post-closing on his part. Before the closing, you are on opposite sides of the table, and then very quickly you are on the same side of the company. If we had been focused on just one company, we might have been able to dig deeper for what might have been yellow or red flags. The reality was that we did not get to some of the crucial conversations. This is all speculation and in hindsight.

Maybe if you are entering a new field, the added complexity of merging 2 companies makes it too difficult to anticipate the ways in which things could be different from your assumptions. We discovered the misalignment as we started to learn what we needed from a core capability standpoint and as we started to learn about his strengths and weaknesses.  

Having said that, the business grew well from the beginning. What we learned was the distinction between what is good growth and what is not good growth, good and bad clinical models, reimbursement structures, and compliance on a state by state basis. We learned specific things related to the nuances of operating a behavioral health business.   

Such as? 

This is a very people intensive business. We have a large professional clinical workforce. We had to learn what the primary motivators are for the folks who have chosen this field as a career. We had to learn which segments of our services were better from a clinical services and outcomes perspective as well as a sustainable reimbursement perspective. We ended up proactively growing into a few different states and geographic locations that were independently executing to insulate our business against competitive and regulatory dynamics. In 2009, our largest segment was education systems in California and Hawaii, which became very challenging in the state budget climates of the recession. We were struggling in the first few years on the internal and external relationships and reimbursement dynamics. We ultimately divested parts of the business as leaders who had gained specific domain expertise in this field as we understood all of these dynamics   

I saw that you divested of the Hawaii business, what about the California business?

We focused on commercial healthcare services. School based services went from 90% of what we did to 10%. Commercial healthcare has gone from a small percentage to about 75%.  

What advice would you give to an acquiring searcher? 

How do I extract broader learning for a new searcher? My learning has been on the deal evaluation side. Neither my partner nor I came from a private equity background. If we had, we possibly would have been savvier on how to evaluate deals, especially in the due diligence process. We also certainly learned a lot about leading and managing people and building culture, setting clear expectations and having the appropriate managerial systems.

Searching gets you to the starting line, not a finish line. You work so hard during your search to get to what feels like a finish line --getting the deal done. It feels like an end point. But, it's almost like training for the marathon. When the gun goes off is when the real work starts on running the marathon. I recommend having a game plan on running the company. If you find a good company, your next steps may be scripted. Actively tap the expertise of search investors and advisors during diligence and in those first months of operations. Most of them have had that experience directly and indirectly multiple times and will have good frameworks for problem solving to apply.  

Sticking to your analogy, if you're running the marathon, what other tools does a searcher need?  

Through the diligence process find advisors who have been in the specific field you are entering. You want to develop a high level of trust and open communication about the specifics of what you are doing well and not well. You want to have a really low ego around seeking advice and using your advisors. It's worth finding the right relationships, where you don't feel like you have to impress them. Some searchers may be worried as being perceived as not being up to the task/over their heads. Check your ego at the door and find folks you feel comfortable accessing in that way.  

What was your perspective on developing culture? Did you want to use one company's culture or merge the two cultures? 

We learned fairly quickly that neither of the companies had a unified culture. Each clinician in each office was operating differently from each other. We had to start from scratch. The original thesis was to partner with the first owner and take his company's systems and integrate the second company and we would end up with this great operating entity and culture. We learned we would have to build culture from the beginning.

We did the SWOT analysis of the organization. We really drilled into defining the new company so that we could communicate it effectively and consistently. Over a series of months, we had white board sessions on what we were doing well and not so well. We would talk about mission, vision and values. We were striving for clarity so that any team member could make a decision on whether they could buy or not buy into the company. 

It wasn't about mugs or wall signs. Not a corporate slogan. For the mission statements, we looked at the mission statements of companies that we admired. How do we take the essence of what and how those good companies represent to internal and external stakeholders? I recall looking at Google's statement at the time, which was one simple sentence and felt we needed to describe our mission that clearly. We eventually narrowed our mission statement to one sentence. 

We exist to maximize the potential of the clients we serve. That simple.   

There were many concepts we could have incorporated -- we want to work hard, be thoughtful, be respectful, use research-based practices. But ultimately, the organization exists to maximize the potential of our clients. 

When describing our values, we had a whole white board full of ideas and concepts and boiled it down to 5 core values.   

Our first company value is: Clients First. In this work, we are entrusted by families with their loved ones, we have to do it with Integrity, Excellence (getting better every day), Teamwork and Fun. 5 words but then you could drill down into greater description.   

We tried to be very thoughtful about building a company that we always wanted to work for. That's how we went about it and that is what we ultimately built.  

Trumpet has an excellent reputation with parents and clinicians. Where we might have improved our mission and values effort would be to put more focus on operational consistency and productivity. But that is looking in hindsight.  

How much of your time was spent on culture?

Honestly, I think it was close to 100%.

Everything we did in the beginning was building culture. Whether I was having a meeting with my CFO or a performance management conversation with direct reports, I feel like the CEO's role is to constantly be messaging the fundamental mission, vision and values and reinforcing them.   

Do you have any final advice for searchers? 

Everyone is going to come in with varying perspectives on what they are good at and not good at. I would encourage them to double down on that scrutiny.  

A lot of things we could have done better sprang from some of the initial challenges of the deals we did and not having advisors who were experienced in the field.  

I would say be mindful of your blind spots and then seek to fill then in both on skill side and domain side.

Thank you. 

Summary of Insights

Here are our a few of the key takeaways from our discussion with Lani:

" Taking advantage of a rapidly changing market dynamics (in our case a legislative trend) can present good business opportunities (Part I). BUT, BUT, BUT, you have to make sure the company you are investing in is ready to take advantage of the change.

" Know your blind spots, act as devil's advocate, and dive deep into yellow and red flags related to the foundation of the business. If you can, compensate for blind spots with trusted advisors. (Part I & II).

" Being a searcher is like training for a marathon, the race begins once you purchase a business. (Part II).