Jon Vick, president of ASCs Inc., provides seven best practices for selling ASC shares.
1. Sell shares if you're overweight. Physicians who own 10-20 percent of a center worth $12 million-$14 million are probably "overweight," Mr. Vick says. By that he means an excessively high proportion of their overall assets are in the ASC. This isn't desirable because the center is an "illiquid" asset that cannot easily be turned into cash when needed. He advises investing more of one's wealth in liquid assets such as stocks. "When you have $5 million in total assets and $3 million of that is invested in the ASC and the real estate, then you're considered overweight," Mr. Vick says. Ideally, 40 percent of investments should be in stocks, 30 percent in bonds and only 30 percent in other assets, including an ASC.
2. Have a pre-planned exit strategy. Physician-owners need to plan their exit strategy from the ASC in advance. "When you decide to sell your shares in an ASC, it takes a great deal of time to complete the process," Mr. Vick says. It takes 6-12 months from beginning to end. First, it takes at least 30 days to determine goals and collect data about the center to determine its sales value. Then, since many of the shares will be sold to a management company, it takes 30-60 days to meet with 3-4 companies and develop a proposal. Finally, it takes 60-90 days to develop purchase and management agreements.
3. Start selling before the ASC ages. Since many physician-owners are about the same age, they will be selling at about the same time, at a point when the ASC won't be growing as fast as before. "ASCs experience dramatic growth in their early years, as new physicians come on board and volume ramps up," Mr. Vick says. "Then volume slows and the value of the facility levels off." He advises to strike when the iron is hot. "The longer the physician holds interest in the center, the lower the return will be," he says.
4. Sell off shares in three stages. Mr. Vick recommends exiting from the ASC in three steps, based on the physician's age. Physicians should sell 50 percent of their interest at 50-60 years of age, sell 25 percent in their early 60s, and sell the last 25 percent at retirement. "You don't want to remove all your shares at once because they are an excellent investment," he says. In many cases, physician-owners of ASCs receive a 75-100 percent return on investment per year. Also, ASCs in which physicians have an ownership stake are thought to be more profitable.
5. Sell shares to a management company. Physicians should consider selling their stake to a management company to ensure a strong future for the ASC as their careers wind down, Mr. Vick advises. The management company typically pays a multiple of 6.5-7 times EDBITA, compared with a multiple of 5-6 times EDBITA typically paid by a hospital and about 3.5 times paid by other physicians. The initial partnering company is looking for short-term ownership and buys a minority interest. At the next stage of selling off shares, that company is replaced with a management company that will buy majority interest and stays on as the physician-owners retire.
6. Sell some shares to younger physicians. Younger physician-owners can help buoy volume as older physician-partners slow down. But they require an ownership stake and typically they have few assets and cannot afford to buy big shares. This means restructuring ownership when older physicians start selling off their shares. Instead of selling younger physicians the usual partnership blocks of 10-20 percent, sell them shares of 1-5 percent and provide them with a discount. The younger partners can then build up their ownership stake.
7. Sell real estate separately. Since the management company typically does not want the ASC's real estate, sell it to a medical real estate investment trust, but do so only after closing the deal with the management company. The REIT will be more interested in an ASC backed by a management company. To further increase the sales price, raise the rent to fair market value. Physician-owners usually keep the rent low to help boost the ASC's bottom line, but once the real estate and the operation have separate ownership, that reasoning no longer holds. "While a higher rent might reduce profitability of the center by 1-2 percent, it will increase the value of the real estate by 5-10 percent," Mr. Vick says.
Learn more about ASCs Inc.
Read more insight from Jon Vick:
- Selling Your ASC in a 'Buyer's Market'
- Partnering With a Corporate Entity Versus a Hospital
- Best Time to Bring in a Hospital Partner for Your ASC