Jon Vick of ASCs Inc. gives a detailed picture of the ambulatory surgery center buyer's market, what qualities buyers look for in potential ASC acquisitions and how ASC leaders can position their centers to attract the right buyers. Question: Who are the primary buyers in the current ASC market?
Jon Vick: The primary buyers are the 30-plus ASC management companies, also referred to as strategic partners because they help ASCs improve their performance through various proven strategies. In our experience over 90 percent of the acquisition transactions for ASCs are initiated by the ASC management companies.
Several of the leading ASC management companies will then recruit a hospital partner as a minority (26 percent or so) partner. The center would then be owned 51 percent by the ASC management company and hospital partner together, usually in about equal amounts, and 49 percent by the physicians so the physicians end up owning the largest block, which helps them maintain some control.
We recommend that the initial sale be to the management company as these companies value the centers as a multiple of EBITDA or cash flow, the market approach, while hospitals use the income approach (present value of future cash flows) which discounts future cash flow and results in a lower value for the center. The higher value offered by the management companies establishes a higher fair market value for the center and this becomes the benchmark for the hospital's investment.
Q: Do different buyers look for different qualities in potential acquisitions?
JV: Yes, the goals of the two buyers are very different, as is the culture, and they look for different qualities in their acquisitions. The management companies are seeking situations where they can bring value to the center in the form of recruiting more physicians, increased volume, renegotiating payer contracts, increased revenues, profits, cash flow and increased distributions to the partners.
The management companies are business-oriented and are looking for business opportunities. Hospital partners, on the other hand, are relationship-oriented and are seeking relationships with the physicians as potential referral sources, a lower cost facility to augment their ACO, and more in-patient referrals. Hospitals are low margin facilities and they have a "low margin" mind set. The ASC management companies typically achieve EBITDA margins of 30 percent to 50 percent, compared with hospital EBITDA margins of 5 percent to 10 percent.
The most productive partnerships we have seen are those that are three-way deals: the physician-owners, an ASC management company partner, whose goal is profitability, and a hospital partner, with contracts that can benefit the ASC.
The biggest mistake we see the physician-owners make is to speak with the potential hospital partner first when they should speak with several ASC management companies first, as their corporate partner can help to bring in the hospital partner in a way that is strategically beneficial for the ASC and financially significantly more beneficial for the physician-owners.
Q: Is there anything ASC owners can do to position their centers as attractive to buyers?
JV: The most constructive steps ASC owners can take to make their center more attractive to buyers include the following: prepare a sales prospectus that includes at least two full years of financial statements; buy-out "deadwood" physicians who bring few cases and physicians who own shares in other centers; make a list of physicians who are potential new recruits, especially orthopedics, pain management, GI and general surgeons; eliminate out-of-network business and replace with in-network business. Finally, summarize growth opportunities that a strategic corporate partner can execute to increase revenues and profits at the center.
Q: Are there any particular ASC markets buyers are more interested in than others?
JV: Strategic buyers are more interested in the growth opportunities for the ASC than in particular markets, with a few exceptions. Urban and suburban markets are more attractive than rural markets; New York has always been the most difficult market due to the tough certificate of need (Article 28) requirements; reimbursements in California have been cut more than in some other markets.
Q: Are there any factors, common or unexpected, that make ASCs less attractive to buyers?
JV: Centers that rely too heavily of out-of-network or workers comp business are out of favor with buyers as these strategies do not produce sustainable revenue and are under attack by the payers. In addition, no buyer is interested in buying single-OR ASCs or ASCs that do any significant volume of cosmetic plastic surgery. Even two-OR ASCs may not be attractive to buyers if they are small, have limited recovery beds and/or are not expandable.
Q: What should ASC owners look for in potential buyers?
JV: First, ASC owners should interview at least three ASC management companies that have a track record of success with the type of ASC that is being sold. Secondly, the sellers should solicit competitive partnership proposals from these companies so the sellers can see a range of offers, terms and conditions.
Third, the sellers should obtain a preliminary plan from the buyers regarding how the prospective buyer would help the center grow, become more profitable and increase distributions. Lastly, the sellers should speak with the references provided by the companies to ensure that the centers already partnered with the companies are getting value for the management services they are receiving from their corporate partner and that the corporate partner is meeting the physician-partners' expectations.
Jonathan C. Vick, the founder and President of ASCs Inc., has assisted in development, merger and strategic acquisition transactions for over 250 physician-owned ambulatory surgery centers, endoscopy centers and surgical hospitals since 1984. He has extensive experience in ASC and EC sales, development, business planning, operations, valuations and strategic mergers and acquisitions. He can be reached at 760-751-0250 or at jonvick2@ascs-inc.com. More information can be obtained at www.ascs-inc.com.
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