What you need to know about the why and when.

Investing in an ambulatory surgery center (ASC) can be a great investment, with ophthalmology-specific centers considered among the best.

Due to efficiencies in eye surgery, ophthalmic ASCs can be a lucrative investment for surgeons — I’ve heard physicians go so far as to say it’s the best investment they’ve ever made. The returns generated by a busy ASC most often serve as a surgeon-owner’s supplemental income to their professional collections. Yet it can still be one of the best ways to invest their money.

So why would a physician ever want to sell his or her shares in an ASC? It may be required when a physician decides to retire or perform surgery in a different center. Another possibility is that a newly recruited practice physician requests shares in the ASC. An alternative scenario is local physicians using the center threaten to leave the ASC and build their own center unless they can buy shares in it.

Every situation is unique, and while selling shares may result in lower yearly dividends in some cases, in others yearly dividends can improve. To illustrate the importance of business acumen in managing partner shares, below are two examples of how selling shares can be a useful strategy to improve a physician’s annual distribution.

Both examples are from my own clients, and to protect their anonymity, I provide limited specific details.

SCENARIO A

A physician who was the sole owner of his practice was looking to bring on a partner. This physician-owner also owned 80% of a one-room ASC, while another physician in the community owned 20%. During negotiations, the new physician expressed an interest in ASC ownership, asking for a 20% share.

The concern: The original owner was worried about selling 20 of his 80 shares, fearing it would decrease the yearly dividends he and his family received.

The math: A proforma for the center showed that if the current owner sold 20% of his shares and the new physician performed 400 cataract cases per year, the projected earnings for the original owner were likely to be the same. Furthermore, if the new physician performed 700 cataract cases per year at the ASC, the dividends for the original owner were projected to be more than $100,000 higher annually. These projections were based on the center having available capacity and the new physician bringing more cases to the ASC.

The outcome: After conversations with the new physician, a thorough understanding of his volumes and knowing the amount of surgery he performed, the original owner was able to make an informed business decision. He sold 20 shares at a 3.5 multiple of EBITDA (earnings before interest, taxes, depreciation and amortization), knowing he would enjoy increased dividends as the new partner increased the surgical volume at the ASC. This financial outcome is a result of ASC profitability increasing when its fixed expenses are utilized more efficiently to produce revenue.

SCENARIO B

A well-established ophthalmology practice had four surgeons, two of whom were owners of a two-room ASC. The other two surgeons actively used the center, while one eye surgeon outside the practice utilized the center on a limited basis. At that point, the ASC was being utilized at about half its capacity. Meanwhile, the two non-ASC owner-physicians in the practice became interested in buying shares. At the same time, the two owners considered selling shares to physicians outside of the practice who worked in the community but did not currently do cases at the ASC.

The concern: The physician-owners did not want to disenfranchise the other physicians within their group. Meanwhile, they didn’t want to lose the dividends they had grown accustomed to receiving every year from the center.

The math: If both owners sold half of their shares to the other two internal physicians without an increase in volume at the center, their yearly dividends would drop in half. However, a proforma for the ASC showed that if the center’s capacity was fully utilized, the net earnings of the center would increase by roughly 160%. If the center could be fully utilized by bringing in additional surgeons, the current two owners could each sell 30 of their 50 shares — freeing up 60 shares for purchase — and make slightly higher dividends than they were currently receiving.

The outcome: With a good proforma and strategic plan in place, the two original owners offered to sell a portion of their shares at a four-times multiple of EBITDA to both current practice partners and select ophthalmologists within the community. While the business plan would take some time to evolve, these shares could be sold with confidence. Furthermore, this strategic plan enabled the ASC to retain its talented surgeons while simultaneously increasing volume and net profit by adding new physician-owners.

DIFFERENT SCENARIOS = DIFFERENT OUTCOMES

The aforementioned scenarios were based on centers that had both available capacity and interested physicians who would bring additional cases to each ASC. When an ASC is able to more efficiently utilize its fixed expenses, it becomes more profitable. In such cases, the original owner(s) will likely increase dividends by selling off shares to other (busy) surgeons.

It is important to note that although selling shares of an ASC doesn’t always yield higher returns, these opportunities should always be viewed as strategic business decisions. The ownership of ASC shares should not only be seen as a right to current income streams. In some cases, selling shares to maximize the use of the center is financially beneficial for all parties. In other instances, selling shares may be necessary to retain the interest of good surgeons who work in the center, though dividends may decrease slightly as a result.

Regardless of the situation, it is critical that surgeons who are considering selling their ASC shares develop a financial proforma to guide them in making an informed decision that is best for the ASC and all shareholders. OM

Dixon Davis, a senior consultant with BSM Consulting, is based near Salt Lake City, Utah. Before joining BSM, Mr. Davis worked for 17 years with physician groups, independent practice associations and a privately held company focused on health-care education and product development.