OASC | SELLING YOUR ASC
Don’t Put Dollars Before Sense
How to evaluate a potential ASC sale
By Maureen Waddle, principal and senior consultant, BSM Consulting
A well-run ASC can be a great investment for ophthalmologists. However, running an ASC can involve a great deal of work, and, at some point, many owners might find themselves considering selling all or part of the surgery center. In today’s market, it is highly likely that a successful ASC would attract the attention of a number of potential buyers — for example, a local hospital, a privately or publicly held surgery center company, an accountable care organization (ACO), a private-equity firm, or other surgeons in the area.
While an in-depth financial impact analysis is an important and essential step when deciding whether to sell all or a portion of an ASC, there are several other strategic questions to consider first. Therefore, before embarking on the selling process, it is important that a clear strategy is in place and all shareholders agree on the reasons for the sale.
Strategic Reasons for Selling
Through the years, surgery centers have been some of the best-performing investments in doctors’ portfolios. As such, there must be compelling reasons to give up that asset. Below are some of the most common reasons a surgery center owner might consider a complete sale or adding an investing partner:
• Shareholder surgeons are planning to retire in the next 5 to10 years and would like someone else to manage the exit strategy.
• The current facility is underutilized (and, therefore, not as profitable as it could be) and physician owners want/need outside expertise to bring in additional providers.
• ACOs or hospitals in the community have captured patient groups and are limiting patient access. A sale of all or a portion of the ASC to an entity (usually a hospital) will help physicians and the facility maintain access to patients.
• The owners feel that a professional management organization could improve buying power and operating efficiency, allowing for more efficient operations that will yield about the same in owner returns despite giving up a percentage of earnings, and the management headaches will shift to the professional managers.
Only after the reason(s) for selling are defined is it possible to identify the best potential partners/buyers. In addition, sellers will be able to ask the appropriate questions to make an informed final decision.
| Question | Deal Breaker or Maker |
|---|---|
| Ownership interest: What percentage of the center are you willing to sell? | Most publicly held companies want at least 51% ownership to consolidate financials. Ownership percentage will also determine voting rights. If you want to maintain control, don’t give up more than 49%. |
| Expertise: Do the interested buyers/investors currently own/operate ASCs with ophthalmology services? | If you answer “no” to this question, but are interested in a partner with ophthalmology management expertise, be aware that you will not be getting what you need for your specialty. However, if you are only looking for a big payout, a company that historically has specialized elsewhere may be willing to pay a higher multiple to gain your expertise in the deal. |
| Decision making: How will the new governance be structured? How do those interested currently engage providers in ASC operations? Do they have a centralized or localized management structure? | Either you do or don’t want to be involved in the management aspects of the surgery center. Understanding how the potential buyer/investor approaches this topic will help you to determine if you have the right partner. Also, you need to understand how much decision-making is expected from the local center manager and what your level of influence will be. Could your local center and market potentially suffer from decisions made to benefit other centers? |
| Ownership track: How will providers become shareholders in the future? Are there any protections in place, such as a supermajority voting clause? | Do all shareholders have to give up a percentage (including the company) upon sale? How will your ownership interest and voting rights be changed? How will new owners be added? These inquiries tie into the question of decision making as well. |
| Payer contracting: Can the interested party give examples of helping partner physicians either obtain or maintain an ACO or hospital contract? What relationships do the potential buyers/investors have with the largest payers, and how will they be able to help in your local market? | Though the Affordable Care Act has caused significant consolidation and the introduction of new contracting entities, such as ACOs, most contracting decisions are still made at the local level. You want a partner that recognizes the importance of being on the ground level and building relationships with all payers to ensure access to patients. |
| Incentive payment programs: How many of the potential buyer’s centers have successfully reported quality measures? How is the interested party prepared to handle bundled payments or a new payment methodology? | Make sure your selected partner understands CMS regulations and protocols and the possible changes to future reimbursement methods. |
| Setting goals: Has the potential buyer done a market assessment of your area? Does the buyer know the competition? How will goals be set? | These answers will help you understand whether your potential new partner has a reasonable business approach. If the interested buyer/investor expects 10% year-over-year growth when you are in a flat market and already have 60% of the market share, the partner does not have realistic expectations. |
| Matching values: Does the interested management team have a track record that demonstrates the same commitment to patient care as you do? Does it share similar business values as you? Does the team appear to be flexible and able to compromise? | A mismatch of values can quickly undermine any relationship. Entering a business partnership like this is like being married. Problems will arise and there will be disagreements. However, if both parties have the same basic values and are willing to work together to find solutions, the relationship can work. |
| Operational considerations: Will you have to change your vendor relationships? Will your schedules change? Will your staff be retained by the new operating entity? How will equipment purchase decisions be made? Is there a software system that must be used? How will IT expenses be handled? How will accounting be handled, including billing and collections? | Operational issues impact your daily activities. You may be willing to compromise in one or two of these areas. However, if the answers start stacking up in the wrong column, you may not have the right partner. |
| Property holdings: Physician groups are often their own landlords. Rarely will a purchasing entity be interested in owning real property. What type of lease agreement is the new partner willing to sign? How does this impact the value of your real estate holdings? | A 10-year lease is not uncommon with these types of deals. Most property owners appreciate the fact that they will have guaranteed lease amounts. Some, however, would like to get out of property ownership. Be advised that it will probably be difficult to find a partner that is also willing to purchase the property. |
| Situation | Range of multiples being applied |
|---|---|
| Single-specialty ASC, buyer is purchasing a controlling interest (51% or more) | 6 – 7.9 multiple (73% of respondents)
4 – 5.9 multiple (27% of respondents) |
| Single-specialty ASC, buyer is purchasing a minority interest (49% or less) | 3 – 3.9 multiple (50% of respondents)
4 – 6.9 multiple (50% of respondents) |
| Multi-specialty ASC, buyer is purchasing a controlling interest (51% or more) | 7 – 8+ (78% of respondents)
4 – 6.9 (22% of respondents) |
| Multi-specialty ASC, buyer is purchasing a minority interest (49% or less) | 4 – 5.9 multiple (65% of respondents)
3 – 3.9 multiple (29% of respondents) 6 – 6.9 multiple (6% of respondents) |
Considerations for Shareholder Discussions
In talking with fellow shareholders, it is important to understand which answers might be “deal breakers” for the group. Therefore, a thorough discussion of all aspects of the sale and any potential buyers/investors must take place to ensure a common goal. The table on page 15 provides a framework for this discussion, including a number of questions to ask, as well as some reasons why shareholders might be interested in the answers. (Note: These questions should be asked before starting the cumbersome process of sharing financial information and negotiating the deal.)
Valuing an ASC: What can I expect from my ASC sale?
If the strategy makes sense and all shareholders are on board, it’s time to talk dollars. Although there are various ways to value an ASC, the most common method is based on projected earnings. Examining historic profit and loss statements and balance sheets will be helpful to understand two key components of valuations: 1) The balance sheet will reveal any interest-bearing debt; 2) the profit and loss statements show the EBITDA, or earnings before interest, taxes, depreciation, and amortization. An average of EBITDA across three time periods is preferred. Typically, this might be the last two complete fiscal years plus a trailing 12-month calculation. A multiple is then applied to determine the value of future cash flows. Downward adjustments to the EBITDA and/or the multiple may be made if there is outstanding debt or there is not enough working capital in the business.
The chart above (“Current Market Multiples”) outlines the market multiples currently being used based on the 2016 ASC Valuation Survey conducted by HealthCare Appraisers.1 Keep in mind, these multiples are usually related to institutional or corporations known as “passive investors.” A local ophthalmologist who brings cases to the center, and, thus, adds much more value than a passive investor, will rarely pay a multiple at the same high level as a passive investor.
More Than Money
Money is certainly important in the decision-making process. However, I’ve seen far too many ophthalmologists who have failed to enter the relationship with the right expectations because they focused only on the financial impact and didn’t consider the strategic impact of the decision. This could result in years of frustration and negative financial impact if such a partnership dissolves. Remember, as with most business decisions, if strategy comes first, the dollars will follow. ■
Reference
1. HealthCare Appraisers Incorporated. 2016 ASC Valuation Survey. Available at: healthcareappraisers.com/ASC_Survey.html
| Maureen Waddle is a senior consultant with BSM Consulting, an internationally recognized healthcare consulting firm with headquarters in Incline Village, NV and Scottsdale, AZ. For more information about the author, BSM Consulting, or any content or resources discussed in this article, please visit BSMconsulting.com. |
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