Blayne Rush, president of Ambulatory Alliances, and Curtis H. Bernstein, managing director of Sinaiko Healthcare Consulting, tackle five questions associated with whether and when to sell an ambulatory surgery center (ASC).
Q: What is the life cycle of an ASC?
Blayne Rush: The lifecycle of an ASC includes startup, initial growth, rapid growth, slowing growth, plateau then decline.
The startup is the pre-development phase where you are trying to figure out what direction you want to go and how you are going to get there.
Then you have the initial growth phase, which is a very important stage in your center's development towards profitability. This is when you set the tone, lay the foundation and the physician partners and utilizers have their first impression of the operations of the center. Additionally, you will be able to address the surgical caseload commitment that you base your business plan's proformas off of.
Profits will not be there until the fix costs are covered. You should focus on working with the physicians to capture the surgical volume that you put in your proformas, on operational efficiencies and containing cost. If you doctors are not aggressively shifting cases to your center, you need to address it in this stage.
You need to be working towards breaking even as quickly as possible. That being said, you should look to see if you need to be open every day or not, have minimal staffing and recruit more physicians that will do cases in your center. I have seen some centers that are four or five years old and are not out of this stage of development.
During the rapid growth stage, you are covering the fixed costs, have worked out the operational inefficiencies and are working well with the surgeons. You are making consistent distributions and your EBITDA is expanding with each added case. Once you are at breakeven, every dollar of revenue should add between $0.65 and $0.85 to the bottom line.
During this expanded growth phase is where the fun begins, where everything that you worked towards moves faster. Your hard work and strategic operations are paying off with results. The profits are being driven by the core doctors.
It is possible that the slow growth phase happens at any time in the ASC life cycle, but most likely it will occur after you capture most of the surgical cases from the original physicians. This phase is when the growth slows down, the excitement is gone, the partnership matures and partners begin to decrease the number of new cases. The business best practices get overlooked and cost containment is not looked after. This very often happens when the team forgets about the fundamentals and thinks the rapid growth is never going to slow down.
At the plateau stage of your ASC, you are having challenges, everything has stalled, you have an administrator with good bit of complacency at best. Partners are disconnected and the partnership starts to break down.
During the decline state, as name suggests, you center is in a state of decline. Partners are bringing cases other places, you have a tough time getting people to show up at the meetings and partners are complicated and disengaged. You will need a turnaround specialist because if you get to this stage, you have missed the ability to capture the best value the center once had to offer.
Q: How does someone know when it's time to consider selling an ASC?
BR: You want to consider selling your ASC when an outside investor can add the most value to the partnership and right as you are peaking with what you can do with the center. This can occur at different stages for different surgery centers. There are buyers and sellers at all stages. It is tough to anticipate a future decline in business, so it is necessary to determine where the surgery center business is and where it is headed.
I recommend that you think of your ownership shares in your surgery center as you would shares in Nike, Facebook, General Electric, etc. — value can go up or down any almost anytime.
Let's take a look at the thought process in a more strategic fashion. What we do if we are brought in early enough in the decision-making process is to recommend doing a SWOT analysis. There are others that you could use to get to the same place, but SWOT is the one most of us have heard about and it is fairly easy and straightforward, so we use it.
A SWOT (Strength, Weakness, Opportunities, Threats) analysis guides you to identify the positives and negatives inside your ASC business (that is the S and W) and outside of it, the external environment (that is the O and T). This will help you to develop a full awareness of your situation which can help with creating a plan and making the decision of whether you hold or sell and what is your path forward if you sell or hold.
You can list internal and external opposites side by side. Answer these simple questions: What are the strengths and weaknesses of your physician group? Your ASC? Your market? Your efforts or actions? And what are the opportunities and threats facing it?
Typically speaking some of the strengths of a surgery center are the following:
• Young, engaged partners
• Multi-specialty case mix
• Well-paying, long-term contracts
Some of the weaknesses are the following:
• Low volume
• High debt
• Disengaged partners
• Low-paying contracts
• Overbuilt center
Some of the opportunities are the following:
• Ability to take on more cases or expand
• Improve payor contracts
• Recruitable surgeons in the market
• Lower expenses
• Improve business best practices
• Internal cases that can be brought to the center
• Able to establish a direct-to patient marketing program
Some of the threats are the following:
• Competing hospitals
• In-office procedural room
• Competing ASCs
• Fractured partnership/disgruntled partners
The major threat to success in the SWOT is "the competition." So it can help to think of the "competition" in a broad sense as you consider threats to your success.
Q: What are the factors affecting the valuation of an ASC in each period of the life cycle?
Curtis Bernstein: During the startup phase, there really isn't much affecting valuation. It really is just what the underlying costs are of developing the center. That will include your fixed costs, such as purchasing the equipment; the beginning working capital you need before you're up and running; you're going to have to hire some nurses, some administrative staff, your management staff; you're going to have to put out some money for some supply inventory; and you might need some consultants to work on filing your Medicare and payor paperwork. There's a number of different costs that go in there. You're just want to make sure that's all covered so when you take that number and divide it by the number of shareholders, you get the appropriate amount that needs to be put in from the beginning to start up that ASC.
Once you get into that initial growth phase, you have your Medicare certification, your credentials with different payors and you start to do your procedures, that's when the actual potential of the ASC comes into account. We're going to look at how many doctors you have involved, what is there ability to perform cases in the ASC now that they're locked in, how many cases we project they will actually do, do they have the capacity to do all of those cases, what is the mix and what is the projected future reimbursement for those types of cases.
We're also looking at some of the changes now with regard to value-based purchasing, what is an ASCs quality of care, how is that quality being performed within your center and how might that overall affect your future reimbursement from Medicare, and how are other payors in your market going. In some markets, we're seeing some payors going to a capitated market with a risk pool and risk scoring. While all of that may not be in the ASC space, it is something we are seeing. We also need to consider hospital purchases of physician practices in the market and how that affects the overall projected growth within that center.
Once you have that center fully syndicated, it starts going up into the rapid growth phase. We're going look at a projection over that time into the slow growth and plateau.
So looking at the life cycle, once you get into that initial growth phase, the value may actually go down because all of the money initially invested is spent, and then, until you're actually up and running, all you have are costs and liabilities. So you may actually see the values shrink a little and then kind of come back up and follow an arc up. We're going to look at multiples of EBITDA if it's a minority interest of 2-3.5x and if it's a controlling interest of 5-7x of that line less debt. Then depending on how much debt you have may adjust that as well. If you have two of the same centers with the same profitability and the same capacity, same physician mix, etc., and Center A has significantly more debt than Center B, Center A, for its stock, is going to be worth less.
If you add more doctors, what's going to happen is the value will go up because you're going to do more cases, you're going to have more profit, and more profit generates more value for the center.
Q: How does someone identify the ideal time to sell an ASC?
CB: It really depends a lot on your motivation and who you're selling to. If you're starting your ASC, and let's say you have five physicians that have bought in, and you had 10 potential physicians within the market that you think should have bought in, so you have five left, you want to try to get them in there as soon as possible because at the end of the day, you want to keep that price low because that's when the physicians are going to want to get in. They're not going to want to get in once the value of that interest becomes cost prohibitive to them. If it gets up to $100,000 or $500,000 — I've seen some get up pretty high — you want them in from the very beginning because that will take you out to through the initial growth phase to the rapid growth phase a lot quicker. Many ASCs skip that initial growth phase other than just having the opening and getting the doctors in there.
As new doctors come into the market, you want them to buy in right away. That will drive up the value. When you're looking to take money off the table and sell to a management company, you want to sell when that profit has been maximized because that's when you're going to get the most money out of the ASC as a seller.
I also think some of the management companies are looking for growth, so they're going to pay a little more of a higher multiple when you still have some capacity for growth and can prove to them that there's the ability for growth. Since they're going to look at same-store sales, they're trying to prove that they're going to make an investment and get all of this profit, and they're trying to prove they bought this ASC and it's going to continue to generate more profit for them.
There's a few ways you can do that — increase reimbursement, decrease expenses and increase the number of cases being performed in the center. If you've locked up a lot of the doctors and grown enough to earn a significant profit but can still prove that there's capacity and people in the market willing to buy in, that's when you're going to maximize your value.
Q: Is there a bad time to sell an ASC?
BR: There are less optimal times to sell you ASC. From a financial sense, if you are still growing rapidly, recruiting new physicians or have the market that would allow, with some help, that growth, then it is in your best financial interest to capture that growth before you sell. In other words, you really do not, regardless of what stage your ASC is in, to sell before the timing is right.
Sounds easy, right? But the challenge is that there are some variables that are unknown in that formula. It is no different than making a surgical decision. You have to look at the situation in its entirety, analyze your ASC first, do a SWOT analysis and look at yours and the market's strengths, weaknesses, opportunities and threats, then pay particularly close attention to your weaknesses and opportunities as this will drive your decision. Make a professional judgment and decision, and then execute on that decision.
I have a few examples of bad times to sell but these were bad times because we had to sell the ASC. If we were advising the centers earlier on in the process we would have taken a different direction with the benefit of time. I once sold a surgery center where the majority owner who was a surgeon had called me nine months prior to us working with him and, in reality, it was too late nine months later. When he first had called us and we discussed the situation in-depth, we recommended that we work together to syndicate and recruit more doctors and then add a strategic partner. He called me nine months later with significant issues hanging over his head. We ended up having to sell his CON and assets just to mitigate his damage.
The essential theme of the answer to the question, "Is there a bad time to sell my ASC?" is that it is a bad time to sell when you wait until you have no other option but to sell — or, in other words, when you are forced to sell. Timing is a big key, and you need to be constantly evaluating your strategic options and executing your plan. If buyers do not add value then it is a less than optimal time to sell.
Blayne Rush, president of Ambulatory Alliances (www.AmbulatoryAlliances.com), is an SEC-registered and FINRA-licensed investment banker. He specializes in ASC brokerage; ambulatory surgery center turnarounds and increasing ASC valuations through physician recruitment and syndications; and access to the capital markets and capital structuring consulting for surgery centers, urgent care centers and radiation oncology centers.
Curtis H. Bernstein, ASA, CPA/ABV, CVA, MBA, is managing director of Sinaiko Healthcare Consulting (www.Sinaiko.com). He specializes in providing valuation, transaction advisory, strategic and operational consulting services to clients. He has extensive experience working closely with hospital systems, physician groups, ASCs and other healthcare providers.
Q: What is the life cycle of an ASC?
Blayne Rush: The lifecycle of an ASC includes startup, initial growth, rapid growth, slowing growth, plateau then decline.
The startup is the pre-development phase where you are trying to figure out what direction you want to go and how you are going to get there.
Then you have the initial growth phase, which is a very important stage in your center's development towards profitability. This is when you set the tone, lay the foundation and the physician partners and utilizers have their first impression of the operations of the center. Additionally, you will be able to address the surgical caseload commitment that you base your business plan's proformas off of.
Profits will not be there until the fix costs are covered. You should focus on working with the physicians to capture the surgical volume that you put in your proformas, on operational efficiencies and containing cost. If you doctors are not aggressively shifting cases to your center, you need to address it in this stage.
You need to be working towards breaking even as quickly as possible. That being said, you should look to see if you need to be open every day or not, have minimal staffing and recruit more physicians that will do cases in your center. I have seen some centers that are four or five years old and are not out of this stage of development.
During the rapid growth stage, you are covering the fixed costs, have worked out the operational inefficiencies and are working well with the surgeons. You are making consistent distributions and your EBITDA is expanding with each added case. Once you are at breakeven, every dollar of revenue should add between $0.65 and $0.85 to the bottom line.
During this expanded growth phase is where the fun begins, where everything that you worked towards moves faster. Your hard work and strategic operations are paying off with results. The profits are being driven by the core doctors.
It is possible that the slow growth phase happens at any time in the ASC life cycle, but most likely it will occur after you capture most of the surgical cases from the original physicians. This phase is when the growth slows down, the excitement is gone, the partnership matures and partners begin to decrease the number of new cases. The business best practices get overlooked and cost containment is not looked after. This very often happens when the team forgets about the fundamentals and thinks the rapid growth is never going to slow down.
At the plateau stage of your ASC, you are having challenges, everything has stalled, you have an administrator with good bit of complacency at best. Partners are disconnected and the partnership starts to break down.
During the decline state, as name suggests, you center is in a state of decline. Partners are bringing cases other places, you have a tough time getting people to show up at the meetings and partners are complicated and disengaged. You will need a turnaround specialist because if you get to this stage, you have missed the ability to capture the best value the center once had to offer.
Q: How does someone know when it's time to consider selling an ASC?
BR: You want to consider selling your ASC when an outside investor can add the most value to the partnership and right as you are peaking with what you can do with the center. This can occur at different stages for different surgery centers. There are buyers and sellers at all stages. It is tough to anticipate a future decline in business, so it is necessary to determine where the surgery center business is and where it is headed.
I recommend that you think of your ownership shares in your surgery center as you would shares in Nike, Facebook, General Electric, etc. — value can go up or down any almost anytime.
Let's take a look at the thought process in a more strategic fashion. What we do if we are brought in early enough in the decision-making process is to recommend doing a SWOT analysis. There are others that you could use to get to the same place, but SWOT is the one most of us have heard about and it is fairly easy and straightforward, so we use it.
A SWOT (Strength, Weakness, Opportunities, Threats) analysis guides you to identify the positives and negatives inside your ASC business (that is the S and W) and outside of it, the external environment (that is the O and T). This will help you to develop a full awareness of your situation which can help with creating a plan and making the decision of whether you hold or sell and what is your path forward if you sell or hold.
You can list internal and external opposites side by side. Answer these simple questions: What are the strengths and weaknesses of your physician group? Your ASC? Your market? Your efforts or actions? And what are the opportunities and threats facing it?
Typically speaking some of the strengths of a surgery center are the following:
• Young, engaged partners
• Multi-specialty case mix
• Well-paying, long-term contracts
Some of the weaknesses are the following:
• Low volume
• High debt
• Disengaged partners
• Low-paying contracts
• Overbuilt center
Some of the opportunities are the following:
• Ability to take on more cases or expand
• Improve payor contracts
• Recruitable surgeons in the market
• Lower expenses
• Improve business best practices
• Internal cases that can be brought to the center
• Able to establish a direct-to patient marketing program
Some of the threats are the following:
• Competing hospitals
• In-office procedural room
• Competing ASCs
• Fractured partnership/disgruntled partners
The major threat to success in the SWOT is "the competition." So it can help to think of the "competition" in a broad sense as you consider threats to your success.
Q: What are the factors affecting the valuation of an ASC in each period of the life cycle?
Curtis Bernstein: During the startup phase, there really isn't much affecting valuation. It really is just what the underlying costs are of developing the center. That will include your fixed costs, such as purchasing the equipment; the beginning working capital you need before you're up and running; you're going to have to hire some nurses, some administrative staff, your management staff; you're going to have to put out some money for some supply inventory; and you might need some consultants to work on filing your Medicare and payor paperwork. There's a number of different costs that go in there. You're just want to make sure that's all covered so when you take that number and divide it by the number of shareholders, you get the appropriate amount that needs to be put in from the beginning to start up that ASC.
Once you get into that initial growth phase, you have your Medicare certification, your credentials with different payors and you start to do your procedures, that's when the actual potential of the ASC comes into account. We're going to look at how many doctors you have involved, what is there ability to perform cases in the ASC now that they're locked in, how many cases we project they will actually do, do they have the capacity to do all of those cases, what is the mix and what is the projected future reimbursement for those types of cases.
We're also looking at some of the changes now with regard to value-based purchasing, what is an ASCs quality of care, how is that quality being performed within your center and how might that overall affect your future reimbursement from Medicare, and how are other payors in your market going. In some markets, we're seeing some payors going to a capitated market with a risk pool and risk scoring. While all of that may not be in the ASC space, it is something we are seeing. We also need to consider hospital purchases of physician practices in the market and how that affects the overall projected growth within that center.
Once you have that center fully syndicated, it starts going up into the rapid growth phase. We're going look at a projection over that time into the slow growth and plateau.
So looking at the life cycle, once you get into that initial growth phase, the value may actually go down because all of the money initially invested is spent, and then, until you're actually up and running, all you have are costs and liabilities. So you may actually see the values shrink a little and then kind of come back up and follow an arc up. We're going to look at multiples of EBITDA if it's a minority interest of 2-3.5x and if it's a controlling interest of 5-7x of that line less debt. Then depending on how much debt you have may adjust that as well. If you have two of the same centers with the same profitability and the same capacity, same physician mix, etc., and Center A has significantly more debt than Center B, Center A, for its stock, is going to be worth less.
If you add more doctors, what's going to happen is the value will go up because you're going to do more cases, you're going to have more profit, and more profit generates more value for the center.
Q: How does someone identify the ideal time to sell an ASC?
CB: It really depends a lot on your motivation and who you're selling to. If you're starting your ASC, and let's say you have five physicians that have bought in, and you had 10 potential physicians within the market that you think should have bought in, so you have five left, you want to try to get them in there as soon as possible because at the end of the day, you want to keep that price low because that's when the physicians are going to want to get in. They're not going to want to get in once the value of that interest becomes cost prohibitive to them. If it gets up to $100,000 or $500,000 — I've seen some get up pretty high — you want them in from the very beginning because that will take you out to through the initial growth phase to the rapid growth phase a lot quicker. Many ASCs skip that initial growth phase other than just having the opening and getting the doctors in there.
As new doctors come into the market, you want them to buy in right away. That will drive up the value. When you're looking to take money off the table and sell to a management company, you want to sell when that profit has been maximized because that's when you're going to get the most money out of the ASC as a seller.
I also think some of the management companies are looking for growth, so they're going to pay a little more of a higher multiple when you still have some capacity for growth and can prove to them that there's the ability for growth. Since they're going to look at same-store sales, they're trying to prove that they're going to make an investment and get all of this profit, and they're trying to prove they bought this ASC and it's going to continue to generate more profit for them.
There's a few ways you can do that — increase reimbursement, decrease expenses and increase the number of cases being performed in the center. If you've locked up a lot of the doctors and grown enough to earn a significant profit but can still prove that there's capacity and people in the market willing to buy in, that's when you're going to maximize your value.
Q: Is there a bad time to sell an ASC?
BR: There are less optimal times to sell you ASC. From a financial sense, if you are still growing rapidly, recruiting new physicians or have the market that would allow, with some help, that growth, then it is in your best financial interest to capture that growth before you sell. In other words, you really do not, regardless of what stage your ASC is in, to sell before the timing is right.
Sounds easy, right? But the challenge is that there are some variables that are unknown in that formula. It is no different than making a surgical decision. You have to look at the situation in its entirety, analyze your ASC first, do a SWOT analysis and look at yours and the market's strengths, weaknesses, opportunities and threats, then pay particularly close attention to your weaknesses and opportunities as this will drive your decision. Make a professional judgment and decision, and then execute on that decision.
I have a few examples of bad times to sell but these were bad times because we had to sell the ASC. If we were advising the centers earlier on in the process we would have taken a different direction with the benefit of time. I once sold a surgery center where the majority owner who was a surgeon had called me nine months prior to us working with him and, in reality, it was too late nine months later. When he first had called us and we discussed the situation in-depth, we recommended that we work together to syndicate and recruit more doctors and then add a strategic partner. He called me nine months later with significant issues hanging over his head. We ended up having to sell his CON and assets just to mitigate his damage.
The essential theme of the answer to the question, "Is there a bad time to sell my ASC?" is that it is a bad time to sell when you wait until you have no other option but to sell — or, in other words, when you are forced to sell. Timing is a big key, and you need to be constantly evaluating your strategic options and executing your plan. If buyers do not add value then it is a less than optimal time to sell.
Blayne Rush, president of Ambulatory Alliances (www.AmbulatoryAlliances.com), is an SEC-registered and FINRA-licensed investment banker. He specializes in ASC brokerage; ambulatory surgery center turnarounds and increasing ASC valuations through physician recruitment and syndications; and access to the capital markets and capital structuring consulting for surgery centers, urgent care centers and radiation oncology centers.
Curtis H. Bernstein, ASA, CPA/ABV, CVA, MBA, is managing director of Sinaiko Healthcare Consulting (www.Sinaiko.com). He specializes in providing valuation, transaction advisory, strategic and operational consulting services to clients. He has extensive experience working closely with hospital systems, physician groups, ASCs and other healthcare providers.