Favorable market conditions driven by hospitals and ASC management companies looking to partner or consolidate are making ambulatory surgery centers more attractive than ever. So when is the right time to sell an ASC and what should owners consider before making the move?
Barton Walker, a partner in the Healthcare Department of McGuireWoods law firm in Charlotte, NC, and Jon Vick, president of ASCs Inc., of Valley Center, Calif., spoke on the topic in advance of their broader discussion at Becker's 23rd Annual Meeting, October 27-29.
There are several scenarios that would make the sale of an ASC timely.
Sellers can lock in the gain or profit on the value of the company. Having cash tied down in an investment could create an unstable financial picture for independent ASC owners. Mr. Walker says knowing the value of the center and what a business owner put into it makes all the difference.
"If that business goes down tomorrow, you'll lose your equity and that value," he says.
Like any business, the price of an ASC follows a cycle that ebbs and flows. Currently the market has pricing that is attractive to owners because a number of private equity groups and well-funded strategic players are looking for openings into the market and towards consolidation.
"There are a lot of eligible buyers out there that have a pile of cash they're trying to deploy," Mr. Walker says
Now is the time to sell a "one off" or small, independent ASC because the field is in a period of consolidation.
"It's increasingly a healthcare world where you have to be big to be able to compete," Mr. Walker says. "Small, independent surgery centers and small physician groups are going to find it very hard to negotiate payer contracts or put in place sophisticated data or EMR systems because those are all expensive elements."
Mr. Vick had several reasons why to consider selling your ASC. They include:
- The partners want a liquidity event to take some money off the table, and want the buyer to take future growth into account in the valuation
- The center is still significantly OON and it is becoming harder to collect receivables
- The partners want a liquidity event that fully values their cases before retirement
- It has become difficult to recruit new users and partners
- Future growth has become difficult to project
- Payer contracts need to be renegotiated by a professional team of contract negotiators
- The center is operating inefficiently and needs an operational overhaul
- The center would benefit from referrals from a hospital and access to hospital contracts
- The growth of revenues and profits has slowed and the center would benefit from professional management
- The center needs capital to add partners, equipment and/or capacity.
"The most successful method of selling an ASC is to prepare and present a detailed, comprehensive confidential investment memorandum that will be distributed to the major purchasers in the ASC market, plus local hospitals and private equity firms," Mr. Vick said.
By doing this, ASC owners create competition among buyers and allows the seller numerous partners to pick from. That also allows the ASC owner to get the highest possible value for a center.
The importance of preparation for the sale to ensure owners get the highest value. While ASCs are valued within a range of multiples of earnings before interest, taxes, depreciation and amortization, it is possible to get a high multiple if the proper preparations are made prior to soliciting offers, Mr. Vick said. When the proper steps are taken, ASCs Inc., has seen both multiples and EBITDAs increase significantly.
Preparation includes these steps that can significantly increase the value of an ASC:
- Uncover and correct problems before the sale
- Identify untapped areas of growth and take steps to realize them
- Determine and improve "quality of earnings" (diversity of revenue base, payer characteristics, age of physicians, succession plans, in-network and out-of-network revenue ratio, sustainability of staffing and operational plans, etc.)
- Create a pro forma that includes growth opportunities (addition of surgeons, 23-hour stay, elimination of non-recurring items, improvement in earnings from renegotiated contracts, etc.).
ASCs often hold the most value when the physician owners are entering their prime and are about to make the most money of their careers. Mr. Walker said in that case, a physician should factor in the profits that would be left on the table by selling into the final price, and determine what it would mean to the bottom line.
"Instead of earning 100 percent of a pie that's worth a million dollars you could own 49 percent of a pie that's worth $3 million," Mr. Walker said.
Learn more from Mr. Vick and Mr. Walker at Becker's 23rd Annual Meeting-The Business and Operations of ASCs in October 2016! Click here for more information.
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