6 Questions on How to Prepare to Sell Your ASC: Q&A with Blayne Rush and Curtis Bernstein

How to Prepare to Sell Your ASC

By: Robert Kurtz

Blayne Rush, president of Ambulatory Alliances, and Curtis H. Bernstein, managing director of Sinaiko Healthcare Consulting, tackle six questions associated with physicians preparing to sell their ambulatory surgery center (ASC).

Q: What are the goals of the preparing-to-sell stage?

Blayne Rush: When you think about selling your ASC as surgeon owners, you will have a few outcomes that you want see. Typically some of those outcomes are peak price and terms as well a corporate partner that will help grow your business.

In order to put your business in the best position possible to reach those outcomes, you must work hard in preparing your surgery center for sale. That being said, the goal of the prepare-to-sell stage is to prepare your surgery center so that it looks as appealing as possible to potential buyers. Just as you would put a new coat of paint on your house before selling, you should make your company look as attractive as possible. This takes time, effort, money and foresight. Physician owners might find that their ASC runs better with all of these value enhancing factors in place, which makes their implementation a good idea for all parties involved. Buyers and investors will find that preparatory work enables them to recognize the right acquisition fit when it comes across their desk. Making sure your surgery center is as appealing as possible requires us to look at the issue in a multidimensional manner.

Some of the goals are as follows:

  • To increase the speed of the process
  • To make the process more efficient
  • To manage and increase the overall perception of the buyers (which directly affects the value)
  • To learn as much about your business as you can; you would be surprised to know how much owners of surgery centers really know about the operations of their business

You want to properly position your business and articulate its investment merits. This process also allows for the identification of potential buyer concerns on issues ranging from growth sustainability, margin trends, case or procedural concentration, and contingent liabilities to any physician partner issues.

You need to understand the assumptions that drive your financial model. This is very important as this forms the basis for the valuation that will be performed by the prospective buyers/investors. Therefore, you must approach your financial projections from the buyer’s perspective and gain comfort with the numbers, trends and key assumptions driving them.

You need to understand the valuation methodologies that buyers will use in their analysis (comparable companies, precedent transactions, DCF analysis and sometimes LBO analysis, which is using debt). The more questions you answer upfront, the fewer you must answer during the process to get the buyers familiar with your ASC’s story. The longer your business is on the market, the easier it is to lose momentum. Time kills deals. Speed matters, thus this process matters.

When it comes to efficiency, the more information you provide the buyer, the more quickly the buyer can determine interest level in the opportunity. No surgeon owner wants to waste time educating a potential buyer on the business only for the buyer to indicate a lack of interest. So the sooner you can help some of the buyers screen themselves out, the better. Use this process to help you decide which buyers to spend time with and ignore the rest.

When it comes to buyer perception, buyers are influenced by appearances. The better prepared you are, the better organized you are and the better you understand and convey your unique message, the better your ASC will look in the eyes of the potential investors. The more authentic and knowledgeable you come across, the more believable your story will be and the more influence you will have on the buyers.

Surgeon owners too often want to speak about how much money the ASC has made them and how great it is, but buyers only care about past performance to the extent that it is a prediction of future growth. If it’s already as good as it gets, then unless the buyer is looking for cash flow or downstream benefits such as a hospital wanting alliances, a buyer may not see the value. One of your goals is to get to know your ASC and market so you can convey to potential buyers where the growth will be. You need to show the investors how far you’ve taken the center and then how they can help you take it well beyond that.

Not doing all of this will increase the likelihood that the entire story and potential of the center will not be known to the buyers, which in turn will equate to less interest and/or less money for you when you sell. I cannot stress it enough: buyers are looking for future value from the purchase or investment.

Q: How should an ASC define its wants, needs and desires?

BR: Whenever you start the prepare-to-sell process or even a little before you need to, understand the physician owners’ and ASC companies’ wants, needs and desires. This will help you in a couple of ways. It will help you get a handle on how you can tell your story — in other words, explain the strategic position of the surgery center in the market place, as well as understand what you need in a new partner and what you want out of a transaction. We can discuss some of the typical wants, needs and desires, but it is very center and owner specific.

I would ask each partner what they want to see in a buyer and what they want out of a sale. This will help with both understanding the questions and with physician buy-in. We also want to take a look at the thought process in a more strategic fashion. What we do if we are brought in early enough in the process is to recommend doing a SWOT analysis. There are other approaches you could use, but SWOT is fairly easy and straightforward, so we use it.

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. A SWOT analysis guides you to identify the positives and negatives inside your ASC business (that is the S and W) and outside of it in the external environment (that is the O and T). This will help you develop a full awareness of your situation, which can help with creating a plan and making the decision to hold or sell as well as your path forward.

You can list internal and external opposites side by side. Answer these simple questions: What are the strengths and weaknesses of your physician group, your ASC, your market and your efforts or actions? What are the opportunities and threats facing it?

Typically speaking, some of the strengths of a surgery center are as follows:

  • Young, engaged partners
  • Multi-specialty case mix
  • Well paying, long-term contracts

Some of the weaknesses are as follows:

  • Low volume
  • High debt
  • Disengaged partners
  • Low paying contracts
  • Overbuilt center

Some of the opportunities are as follows:

  • Ability to take on more cases or expand
  • Improve payor contracts
  • Recruitable surgeons in the market
  • Lower expenses
  • Improve business best practices
  • Internal cases that can be brought to the center
  • Ablity to establish a direct-to-patient marketing program

Some of the threats are as follows:

  • Competing hospitals
  • In-office procedural rooms
  • Competing ASCs
  • Fractured partnership/disgruntled partners

The major threat to success in the SWOT is “the competition,” so it can help to think of the “competition” in a broad sense as you consider threats to your success.

Q: How do you recast finances and clean up a balance sheet?

Curtis Bernstein: Historical income statements and balance sheets are what they are, but most people want to see those cleaned up at least a little. On the balance sheet, common stuff we generally see are payables or liabilities between related parties — perhaps some of the physicians lent some money in addition to equity, and then questions arise on whether it is actually payable or if that can be converted to some form of equity as part of the deal, or how that’s going to come out of the partners’ pocket. Depending on the age and size of the ASC, a lot of times there will be a number of assets that were purchased that may no longer be owned by the center or have been fully depreciated and are now sitting in a storage room, but are still on the fixed asset listing. You’re going to want to spend time reconciling and making sure everything is there to clean that up.

Oftentimes ASCs, because of the nature of their size and desire not to get things too complicated, will not include receivables, inventory, etc. on their balance sheet. It makes sense to take those numbers from your billing system, clean up your balance sheet and use more of an accrual basis, which means that you’re doing it based on what you expected to collect vs. the cash, which is based on what you’ve already collected. On an accrual basis, you would have a receivable, some inventory and you would probably have additional payables above and beyond your credit cards, which are generally on a cash-based balance sheet. So converting things to accrual is always good because it gives you more of a true picture of exactly what is going on. We don’t see a lot of centers actually doing that, but I think it helps with the sales process because it actually tells the buyer what’s happening.

On the income statement side, you’re going to want to get rid of any of those non-recurring, one-time discretionary expenses and make adjustments. What you can do is start with your historical financial statement and create these adjustments in a separate column, and then in a footnote explain for the buyer why you’re making these adjustments.

One of the biggest things I dislike seeing is when you have reports out of a billing system that don’t tie anywhere near to your balance sheet or income statement. You’re showing what kind of revenue you have and your income report might show $3 million and your income statement shows $4 million. Why is your revenue $4 million on your income statement? Maybe you have some rents or other stuff that makes up the difference. Or maybe the buyer wants to find the average rents for surgery centers. I think on the front end you need to understand why there are those differences, and then you can explain them to someone. If there are differences you can’t explain, then you better dig into them a little deeper because at the end of the day, those will probably be adjusted out for projection purposes.

Q: What are the industry value drivers?

CB: I think a lot of what Blayne covered in the SWOT analysis probably addresses a lot of the value drivers. There are obviously more, but having those young, aggressive physicians locked in through financial means or non-competes are a big driver. In certain states, there are certificate of need requirements to create an ASC that then create a good barrier to entry for potential buyers. One thing you probably want to look at closely is your revenue and your payor contracts, and see if there is any way within the market to increase revenue. ASC management companies that own a number of ASCs in your market might have some of that leverage. They might be able to increase some of that third-party, non-governmental revenue through better contracts.

The overall case mix is a factor. There’s been more of a drive toward spine and orthopedics surgery cases. Then there’s the capacity and ability to grow the center. If a center is mature and doesn’t have capacity to grow, it’s great that historically you’ve pulled out $1 million a year out of the center, but you’re kind of stuck at that $1 million unless your reimbursement per case is growing faster than your expense cost per case which, in this environment, is difficult to prove. So unless you’re going to grow more cases, you’re probably going to be fixed at a lower multiple of EBITDA and have less management companies and strategic buyers interested in the sale because of that inability to grow.

Q: What do buyers typically do after they purchase an ASC to improve it? Can an ASC do any of that prior to the sale to increase the value of the center?

CB: Assuming this is a management company rather than a private equity buyer who wants to give you some money to help you grow the business, the traditional management companies out there sell that they can help you negotiate better managed care contracts and they can help reduce some of your supply costs through access to their group purchasing organization (GPO), for example. These are all things an ASC can already do for themselves. Before you go into a sale, one thing I see is people wait until the last minute to start doing these things and think that all of a sudden it’s going to change something. I value a lot of physician practices, and surgeons will suddenly start to do some cases on Saturdays because they think it’s going to increase the value. Well, it’s not going to increase the value because we already know what’s been done historically. Doing these things at the last minute doesn’t make sense.

I suggest getting people involved early — six months or even a few years in advance — so they can help clean up the ASC and improve upon it. Renegotiate those contracts and get better rates. If your payors are looking to do something more unique like go at-risk on certain things, maybe you do that, but you need to know what that means and you probably have to get ahead of the curve on it. That way, when the buyers come in and say these payors are going to use this methodology and when I look at what it means to your center it’s not a good thing, you are prepared for that and make it a good thing beforehand.

Same thing with supply costs. How involved are the doctors in the actual purchases? I’ve seen pretty weak administrators who just take what they’re given, don’t negotiate and don’t try to influence physician preference on what’s used, and the physicians are just using the most expensive options. The buyer is going to come in and know they’re not going to change physician preference. If you work on that beforehand and you show that the preference is changing and it’s going to project additional cash flow for the buyer, the buyer will be happy to know that’s already happening.

Q: What is stage one and two due diligence?

BR: The phrase “due diligence” is actually a misnomer. It was originally used in connection with public underwriting. The principal liability section of the Securities Act (section 11) establishes a defense in securities lawsuits for misleading prospectuses for certain people, such as underwriters, if they exercise due diligence in investigating the company before selling its securities. The term is now more broadly used to mean the investigation that an investor or a buyer undertakes of a prospective seller. The due diligence process is extremely important as it affects the buyer’s decision whether to invest in or acquire the company, at what terms and for what prices.

Additionally, the process allows you to get a very deep and broad understanding of your business because you must be able to present your business in the most favorable light.

As we discussed earlier, the goals of the prepare-to-sell stage is to prepare your ASC so it looks as appealing as possible to a potential buyer. Additionally, the speed of the process, the efficiency of the process and overall buyer perception are three big components that you want to manage. Being organized and proactive vs. reactive helps make those three things happen. This also allows you to get in front of any potential weaknesses you might have or see, and allow you to craft the message around the options you see about how these could be strengthened.

The stage one data and stage two data are essentially the paperwork stages, and can be exchanged remotely and easily; we use a virtual data room with folders and give different levels of access. Some of the buyers will argue that doing due diligence is a costly process for them and want some sort of no-shop or standstill agreement in place. This is not real in my experience, and I am against standstill agreements in most situations without a break-up fee, but that is another topic for another day. Proactively providing the paperwork will help rebut the notion that this process is expensive for the buyers.

As we have stated, there are two stages here. Sometimes, depending on the size and scope of the business we are selling and the buyers we are working with, we will actually combine stages one and two, but with them broken out you can wait to provide  more information as you get more comfortable knowing that the potential buyer is a real buyer.

Here is the information to gather during stage one and stage two.

Stage One

1. Physician Information:

  • Curriculum vitae with D.O.B.

2. Corporate Entity Structure:

  • List of all shareholders
  • Percentage ownership by type of security
  • Description of corporate parent and subsidiary ownership structure

(This information will help us prepare an ownership and corporate structure chart that will enable us to begin to formulate ideas on transaction structure, credentialing, billing, etc.)

3. Financial Statements:

  • Annual statements (P&L and balance sheet) for 2006, 2007, 2008, and 2009
  • Monthly financial statements (P&L only) 2009 and YTD 2010

(This information will help us determine historical and current financial run-rate of the business and formulate a preliminary valuation range.) 

4. Monthly Production & CPT Billing Reports for 2006, 2007, 2008, 2009 and YTD 2010:

  • Monthly charges and utilization by CPT code, consolidated by physician
  • Monthly charges and utilization by CPT code, consolidated by practice
  • Total charges, collections, and adjustments by payor type (i.e. Medicare, HMO/PPO commercial carrier, and all others)

(This information will help us prepare detailed graphs to illustrate the operational profile of business, cyclicality, trends etc.)

5. Description of Case Referrals – Breakdown for last 12 months of:

  • Number of cases sent by each referring physician indicating physician zip code
  • Number of cases sorted by patient zip code origin

(This information helps us understand who is sending patients and where they are coming from. Such information will enable us to begin to forecast patient volumes for its projections model and to formulate ideas on physician marketing.)

6. Fixed Asset Detail:

  • Description of each piece of equipment including manufacturer, model, serial number, manufacture year, year acquired, purchase price, depreciable life, depreciation methodology and book value
  • Description of maintenance contracts for equipment including name of service provider, term of agreement and monthly cost

7. Personnel Headcount:

  • List of employees indicating position, salary, and hours worked per week

8. Real Assets and Lease Terms:

  • Description of  lease commencement date, term, monthly lease obligation, gross or triple net, square footage, and leasehold improvement, if any
  • Description of building, if owned, with construction year and associated debt
Stage Two

1. General Corporate Materials

  • Schedule of all shareholders with percentage ownership by type of security and summary of any agreements relating to voting of securities
  • Schedule of all legal entities (including parent, subsidiary and affiliated entities)
  • Schedule and description (specifying among other things, any voting or economic rights) of all equity or equity-linked securities issued by the Company
  • All organizational documents: PPM/s, subscription agreements, articles of incorporation, certificate of incorporation, charter, bylaws, articles of formation, operating agreement, certificate of limited partnership, partnership agreement, and all other similar documents, instruments or certificates executed, adopted, or filed in connection with the creation, formation, or organization of each Seller, including any amendments thereto
  • Names under which each seller does business or has done business within the past five years

2. Financial Information (Note: Spreadsheet format is preferable)

  • Annual financial statements for the last three full fiscal years.
  • Monthly interim financial statements for the last three full fiscal years and year-to-date (YTD) for the current year
  • Schedule of monthly cash collections for the last three full fiscal years and YTD by payer type supported by bank statements showing fund flows
  • List of the company’s top 10 payors with both gross and net revenues generated by each for the last three fiscal years and YTD
  • Accounts receivable analysis and aging by payor for the past two years
  • Detailed fixed asset ledger with cost, life, annual depreciation expense, accumulated depreciation, and net book value
  • Schedule of all debt instruments (bank debt, capital and operating leases, notes payable, etc.) with description of terms (principal at issue, current balance, term, interest rate, and any significant covenants)
  • Reports, studies and plans prepared by management or consultants on the company’s business or financial condition
  • Budgets, forecasts and three-year financial projections, including any current or past business plans prepared by or at the request of the company, or relating to the proposed business of the company
  • All analyses of the company or its products prepared during the last three years by investment bankers, valuation professionals, management consultants, accountants, customers or others, including marketing studies, credit reports and other types of reports, financial or otherwise

3. Operating Data (Note: Spreadsheet format is preferable)

  • Monthly patient volume data by modality or CPT code for the last 24 months
  • Patient referrals by zip code for last 24 months
  • Patient referrals by referring physician for last 24 months

4. Competition, Marketing and Sales

  • Market segmentation studies and analyses, including measurement/description of market share, competitor’s share, available market opportunity by segment, and projections of opportunity by segment. Please include overview of analyses conducted for other market opportunities
  • Marketing plans describing company strategy, marketing and selling strategies, positioning objectives, competition, market share, physician referral base and prospect base
  • Copies of descriptive literature concerning business and products including catalogs, brochures, marketing presentations, flyers, etc.

5. Physician Relationships

  • Description of any and all contracts or arrangements with physicians regarding employment, consulting, compensation or other agreements or arrangements with physicians including supervisory and medical director arrangements.
  • Any and all physician supervisory agreements including medical director agreements and/or agreements with physicians to serve as the supervising physician.
  • Any and all interpretation (professional reading) agreements between the Company and any other physician, physician organization or hospitals.

6. Agreements

  • Summary of contracts with hospitals or other providers including rates for services, date of execution, date of expiration, language regarding automatic renewal of contracts, and language regarding early termination of contracts
  • Commercial space leases, ground leases and option agreements
  • Credit and term loan agreements, indentures, bonds and other debt, financing or factoring agreements or instruments, any guaranty associated with such loans and any agreements purporting to create liens or encumbrances on any property of each Seller
  • Employment contracts/personal service
  • List of all (and copies of) union contracts and collective bargaining agreements, the number of employees covered under such agreements, and the anticipated date of expiration
  • Management agreements
  • Medical director agreements
  • Billing services agreements
  • Service and maintenance agreements where the annual service charge is in excess of $5,000
  • Purchasing contracts and/or supplier agreements
  • Listing of all contracts with commercial payors, managed care and other private insurance carriers including information on reimbursement rates for high volume procedures and contact information (names, phone numbers and addresses) for each payer
  • Managed care and other private insurance contracts with a list of purchase, supply and sale agreements, including a list of all contracts relating to the purchase of equipment, fixtures, supplies, saleable merchandise or other materials having a price under any such contract in excess of $5,000 annually
  • Confidentiality agreements
  • List and description of all significant oral contracts and commitments
  • (If wholesale, J Summary of client contracts with hospitals or other providers including rates for services, date of execution, date of expiration, language regarding automatic renewal of contracts, and language regarding termination of contracts.)

7. Staffing

  • Management structure and organizational chart
  • Current employee roster including name, position/title, pay rate, date of hire, full-time/part-time/temporary status, exempt/non-exempt status, and union/non‑union status
  • Job descriptions for all personnel
  • Employee handbooks, guidelines and bulletins

8. Medical Equipment

  • Summary of equipment purchases and leases, upgrades and divestiture history including dates and capital expenditures
  • Summary of equipment leases, including name of lessor, asset description, interest rate, payment schedule, buyout price, expiration date, termination rights and costs, and restrictions on transfer or change of control
  • Summary of equipment sale-leaseback arrangements, including name of purchaser/lessor, purchase price of equipment from seller, sale price to lessor, interest rate, buyout price, expiration date, termination rights and costs, and restrictions on transfer or change of control
  • Summary of equipment seller and third party purchase financing agreements, including name of lender, interest rate, amortization schedule, prepayment options and penalties, and restrictions on transfer or change in control
  • Copies of the service records of all equipment
  • List of locations of equipment

9. Real Estate

  • A schedule of all insurance coverage (including general business and professional liability) 

10. Real Property

  • Summary of major properties owned or leased

11. Regulatory and Licenses

  • Summary of all permits, licenses, approvals, determinations and other qualifications issued by any federal, state, or local governmental authority necessary for the operation of Company’s business including, but not limited to, any certificate of need (CON) or similar reviews or letters of non-reviewability.
    • CON or similar reviews
    • Letter of non-reviewability
    • State health licenses or certifications
    • Radioactive materials licenses
    • CMS/Medicare certification
    • Business licenses (county and city)
    • Permits, licenses, authorizations, registrations, approvals and notifications, required under or issued pursuant to any environmental statutes
  • Good standing certificates, for state of incorporation and every state and foreign country in which the Company is qualified to do business
  • Copies of any quality assurance accreditations from Joint Commission, ACR, ACRO, ACOS, etc.

12. Legal & Compliance

  • A list and description of all pending and threatened litigation, claims, arbitration, administrative proceedings or governmental investigations involving the Company or an officer, director, manager, or partner of the Company
  • Description of any audits or investigations of the Seller, pending or threatened, by any federal, state, local, or foreign regulatory bodies or authorities, or having occurred within the last five years
  • Company’s compliance plan or program and copies of compliance meeting minutes for the past 12 months. Please identify the person(s) performing the functions of: compliance officer; privacy officer; risk manager; quality assurance officer; and quality improvement officer
  • Copies of all documents, correspondence, surveys, or other information relating to any alleged violations, orders, deficiencies, or investigations with respect to the Company, including the billing and reimbursement practices of the Company (whether with governmental programs, private third-party payors, or self-payors)

13. Joint Venture, Partnership and Minority Interest Information

  • Summary of surgery center joint venture or partnership agreements and contract terms, including termination dates
  • Summary of management services, billing services and technical assistance, maintenance or support agreements


Blayne Rush, president of Ambulatory Alliances, is an SEC-registered and FINRA-licensed investment banker. He specializes in ASC brokerage; ambulatory surgery center turnarounds and increasing ASC valuations through physician recruitment and syndications; and access to the capital markets and capital structuring consulting for surgery centers, urgent care centers and radiation oncology centers.

Curtis H. Bernstein, ASA, CPA/ABV, CVA, MBA, is managing director of Sinaiko Healthcare Consulting. He specializes in providing valuation, transaction advisory, strategic and operational consulting services to clients. He has extensive experience working closely with hospital systems, physician groups, ASCs and other healthcare providers.

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