The healthcare market is experiencing a sweeping move towards consolidation. In this current climate, ambulatory surgery centers need to consider whether or not to remain independent. Hospitals, management companies and private investment firms all represent possible ASC majority ownership buyers. Before ASCs decide to charge headfirst into a majority ownership transaction, there are few key things to consider. Dan Brown is the founder and managing director of Creative Health Capital, a financial solutions company focused solely on the healthcare industry. Mr. Brown has over 20 years of experience in financial consulting, mergers and acquisitions and customizing ambulatory surgery center transactions. Here he discusses seven steps ASCs should take when moving forward with the sale of majority ownership.
1. Decide if selling is right for you. Before beginning the detailed process of an ownership transaction, ASC investors should be certain they want to move ahead with the sale. Many ASCs place a high value on autonomy and this will be lost with the sale of majority ownership.
"Instead of selling, ASCs can borrow money and make a one-time equity distribution," says Mr. Brown. The ASC owners retain control of all of the equity, but assume a higher risk. Depending on the profitability of the ASC, this risk should be manageable. Outside consultation can help owners make the decision to sell or retain complete ownership.
2. Approach a broker to explore your options. Investment bankers and consulting firms can analyze an ASC's financial information and help the partners make an informed decision.
ASC owners are not obligated to consult a broker, but financial transactions are often more complicated than they imagine. "Sellers can approach buyers by themselves, but this often ends in a failed transaction," says Mr. Brown. Investment bankers have relationships with prospective buyers and an in-depth understanding of the transaction process.
"An advisor will run a process to maximize the potential value for the current investors and help ensure the surgery center ends up with a partner with the appropriate chemistry since they will have to work closely together for several years. Part of this process involves establishing a fall-back plan in case the prospective buyer tries to change the terms of the transaction during the transaction," says Mr. Brown.
3. Make sure your ASC is organized to offer the highest value. Conduct an internal review to command a high price for majority ownership. Organize the center with all proper documents in order and resolve partnership issues to attract the most desirable buyers.
If the ASC partners own the real estate, they should review the lease and check the market value of the property. More value can be extracted from a transaction when the real estate is monetized or sold separately. "An investment bank advisor can optimize the value of real estate at the same time ASC owners are selling part of the operating company," says Mr. Brown. "Real estate assets are valued at a multiple of rent (the inverse of the capitalization rate used to value a rent stream) and by increasing the rent to current market levels, the owners will realize a higher value than through a sale of equity in the operating company, or tenant."
4. Form a transaction team. A transaction of this magnitude is no simple procedure, even when facilitated by an advisor. Form a transaction team led by a physician that contains a small committee of key members. Every detail of the transaction cannot be shared with every team member of the ASC; decisions would never be efficiently reached. The selected team should arrange meetings with prospective buyers, gather documents and make decisions during the process. "The intent isn’t to keep other partners in the dark and they will be consulted for major decisions, but it isn't feasible to run every decision by all the partners so a committee is necessary to run an efficient process," explains Mr. Brown.
5. Meet potential buyers. Hospitals are eager to purchase ASCs and offer the attraction of stability and potentially higher reimbursement rates. Management companies can provide structure, support and physician recruitment. Private investment firms are interested in the investment opportunity represented by an ASC or chain of ASCs. While the potential benefits are known, investors should not accept the first interested buyer without extensive research. "If an ASC is thinking about a transaction, its leaders should go to healthcare conferences to learn about the potential buyers and connect with prospective advisors," says Mr. Brown.
6. Anticipate problems. Prospective buyers will initiate the due diligence process and it will undoubtedly uncover issues that could jeopardize the transaction. "Whether the issue is legal, clinical or reimbursement-related, the buyer will not want to overpay and may try to reduce the price to reflect the perceived risk," says Mr. Brown.
Expect these problems before they ever occur. A majority ownership transaction process takes an average of six to nine months. Sellers should never try to hide potential problems since buyers will likely find them and there is a high probability the deal will fall apart if surprises come up during diligence. The more work and anticipation done before the transaction process begins, the less likely these issues will become major obstacles.
7. Weigh the potential benefits and pitfalls. The sale of majority ownership is attractive because it offers liquidity events (or distributions) for the ASC's partners, cost savings, improved reimbursement and a helping hand through the major transitions healthcare is undergoing. A hospital or management company partner will provide practices for improved efficiency and continuity.
"If ASC partnerships stand alone, the physicians will age and eventually retire. To maintain viability, the ASC owners would need to continually rebuild the partnership over time, but with the sale of majority ownership continuity becomes the responsibility of the larger partner, or ASC management company," says Mr. Brown.
The potential problems ASC owners may have with the sale of majority ownership include higher management fees, non-compete clauses placing restrictions on the physician partners' activities and potentially their employment with hospitals, and the influence of a non-physician partner over major decisions. The addition of a hospital or management company could introduce a layer of bureaucracy that ASC physicians would rather avoid. The possible downside of majority ownership sale is the number one reason investors should be sure to select a buyer that understands the goals of the facility and works well with the physician partners. "If the partners have decided the time is right to sell a majority interest in the ASC, just remember that the only thing that is worse than not doing a transaction is doing a bad one."
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