FAQ

Ambulatory Surgery Center Business Plan

Find answers to all your ASC transaction questions. Many of these may also apply to other ambulatory center transactions, such as endoscopy, radiation oncology, and urgent care center sales.

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Developing My Outpatient Surgery Center (1)

Ambulatory Alliances offers assistance with raising capital with finding a variety of capital options, including minority/ majority recapitalization with a private equity firm and raising debt capital, such as loans from a bank or equity financing.

More details are available here.

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Recruiting Surgeons to My Surgery Center (4)

So What is the difference between ASC syndication and surgeon recruitment and outpatient surgery centers? Physician recruitment is the process by which we recruit physicians and surgeons that will do procedures in our outpatient surgery centers. When we refer to physician recruitment we are not recruiting that physician to invest in the surgery center -at least not until we have established a substantial relationship with them-we want them to use the surgical center for their cases.

Syndication simply refers to a private securities offering of ownership interest in a healthcare company. You run across this term most often in the selling ownership interest in the surgery center business, but you can syndicate just about any kind of healthcare company: surgery center, medical office building, medical equipment company, and so on. Syndication typically takes the form of a sale of limited liability company units or limited partnership interest, although they can also involve the sale of shares in a corporation.

Recruiting surgeons in terms of a surgery center is always part of the surgical center syndication process, but syndication is not always part of physician recruitment.

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The preparation all depends on what stage of the life cycle that the surgery center is in, but a good bit of the process is the same. Let’s start the discussion from the pure recruiting physician’s angle around an existing and operational center cycle.

In the physician recruitment area, one of the first steps is to evaluate the ambulatory surgical center to see if and why any of the current physicians are not bringing all of their qualified cases to the ASC and then what the barriers are to them bringing their cases. Meet with each of the physicians and ask the question: “What can we do differently that will make you more comfortable in bringing all your appropriate cases to the outpatient surgical center?” One of the first steps is to understand where the shortfalls are occurring. The reason that this step is very important is because going forward, ASC operational inefficiencies will strongly affect recruitment and retention of cases and recruiting new doctors to your ambulatory surgery center.

How do you prepare to recruit new physicians to your surgery center? Some of the typical responses

  • Preferences with equipment or instruments not available at the ASC
  • Investments in another surgery center or a procedure suite at their office
  • Hospital politics/pressures
  • Confusion around out-of-network vs. in-network contracting at the ASC
  • Confusion with the surgery center facility cost for cash pay patients
  • Staff or scheduler non-compliance
  • Lack of adherence to start times
  • Lack of familiarity/comfort with ASC staff
  • Lack of transparency – both financially and with executive decisions
  • Third party payer contracts
  • Lack of background research on /compatibility with providers
  • Lack of partner enthusiasm / partner frustration

It is imperative that leadership understands that their top priority is to remove as many barriers as possible so that it is easy for the surgeons/physician to perform all of their qualified cases in this center.

Create pro formas that can quantify the financial benefits adding only a few more cases per month. ASC surgeon-owners must clearly see how incremental case volume growth leads directly to higher margins (given that overhead costs are largely fixed when centers are at breakeven). This helps make the case that the investment of their time in the recruitment process is very profitable.

Evaluate each surgeon’s block times – some surgeons may be able to or open to being flexible with their scheduling in order to accommodate new physicians.

Define the kind of physician you want and can support ,or how you would support physicians that are not married to another ASC. For example, a natural fit for a spine surgery center center is to add pain or other orthopaedic and podiatry. While we at one time could pick and choose what types of specialty docs we wanted to add, this is not the case in all markets. What if you have the physical space that could handle GI, but no GI equipment and you are not making a significant profit to be able to purchase GI equipment. Could you recruit say 3 busy GI physicians  and package them together so they purchase the equipment and then lease it back to the center, essentially creating an endoscopy center? You can justify this since the center is not highly profitable. In other words, you need to be creative through this process.

Determine your recruitment process and who will be responsible for driving it. Putting together a plan will help rally the team and get others bought in. You then will discuss this process with existing partners, physician users and staff. Everyone needs to be on the same page and understand what’s being done, the importance of the process and the value of the process. In other words, get the buy-in and commitment from as many of the current players as possible. We even put together a check list of activities that the team members check off and commit to help with.

Gather current case load statistics such as utilization reports, volume projections and actual cases and current schedules. Get familiar with other metrics like turnover time that you think makes you stick out in a positive way. Collect the equipment list that will allow you to know what cases you can support now.

Create physician recruitment material, such as a one-page fact sheet and a brochure that has pictures of the center, a map of where the center is compared to the hospitals and other landmarks, list of the state of the art equipment, awards, turnover time, and block time available. Use it to tell your unique story and enticing message. Are you 100% physician owned, do you have physical space expansion abilities, what sets you apart from any other center around you? Point of caution: do not have anything in those materials about investing in the surgery center or that there is possibly an opportunity to invest or anything along that line because this is covered under the securities laws which prohibit general solicitation when syndicating a surgery center.

Build a target list of physicians in the area that could do procedures in your ASC. Think broadly here. You can compile a list from many difference sources: the National Provider database, state provider database, research the staff at area hospitals, gather the physicians’ directories, etc.

Anticipate a new physician’s desires and know what you are willing to be flexible on. In most markets there are now a limited number of physicians that can be recruited. Your openness to accommodate will help you in the recruitment efforts. The act of accommodating a physician often requires significantly less effort than the benefits it rewards you.

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Ambulatory surgery centers sometimes look at physician recruitment as a one-time “event,” carried out at some stage in the development, which can later be forgotten about during the center’s day-to-day operation. When should an ASC recruit physicians for the surgery center?   The most successful surgery centers understand and make surgeon recruitment an ongoing process. For some centers, this will be a paradigm shift and one that they will need to make. The market is changing, and centers that do not adapt will not survive.

If you are not at 100% utilization and your goal is to grow the center, you should always be recruiting. Each dollar of revenue once you are at breakeven point can add up to between $.65 and $.80 of profit to the bottom line.  Successful recruitment campaigns are as, if not more, important to the success of your ASC than strong payor contracts and business best practices. The most successful surgery centers have owners that have adopted a physician recruitment mindset. A large part of your administrator’s job needs to be on going physician recruitment. At least 20% of their time needs to be in the field meeting and recruiting new physicians. Physician partners should be recruiting as well. There should not be anything going on as far as what doc is doing their cases where in the market that the administrator does not know about. Nothing! That takes a commitment and lots of work.

Remember that each additional dollar of revenue can add up to between $.65 and $0.80 of profit to the bottom line once an ASC achieves breakeven financial status. Each partner needs to keep that in mind when considering how physician recruitment results in increased patient volume and profitability … their ultimate conclusion will be that case load recruiting is a highly profitable investment of their time.

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Recruiting new physicians to a surgery center, especially in this mature market is a stressful and strategic process, here are some ASC strategies you can use. Approach recruitment and retention as one and the same. You need to be recruiting your current doc in order to retain them because if you are not, someone else is. Additionally, when you are recruiting new doctors you need to approach it with retention in mind. In other words, you need to make sure that everyone understands that this is a partnership and that you will be hopefully be working together for a long time to come. Thus work hard to ensure that everyone is treated as special.

We have a two avenue approach to this process. 1) We work with existing partners and physicians that utilize the center to develop an ongoing target list, gleaned from their knowledge of available physicians (or knowledge of physicians that will know who should be on our radar, such as anesthesiologists, they seem to be in the know and are great resources), and 2) We will create a mass list of all the potential physicians and surgeons that are seeing patients in the center’s market area. We will market all identified physicians through the avenues discussed above.

One of the greatest assets in recruiting new physicians is the mindset and commitment of the current physician base. This support can take form in a variety of ways, including speaking with new recruits, giving tours, attending new recruit open houses, going on physician visits, attending recruitment dinners, making phones calls, and/or agreeing to be part of a letter-writing campaign.  The role of current individual owners will depend on their personalities and comfort level, but nonetheless all owners should accept – as part of their ownership mindset – the responsibility to be part of the recruitment process. The role can range from sharing names of potential new recruits to being the champion recruiter.

Recruitment of new physicians should be an agenda item at almost every board meeting. During discussion on this item, physicians should identify which physicians the ASC should be reaching out to. Ask physician-owners to come prepared to put forth a few names of physicians and a little background — if known — so that the designee responsible for recruitment can pursue that physician in coordination with the physician partners. Part of the ASC’s plan should be to have a continually updated target list of physicians in the community that should be contacted and a list of physicians coming into the community for future consideration.

All owners and staff should be walking billboards for the center to their practice partners and other colleagues, as well as keeping an eye out for surgeons who could become future owners or who could bring cases to the center now. It’s very important that the owners have a compelling “elevator pitch” that briefly highlights the center’s unique benefits and conveys its message. Everyone will be able to use this speech at medical meetings, continuing education courses, or even in the lunch line at the hospital.

Physician-partners should introduce themselves to physicians that are new to the area on a regular basis. The partners should tell these prospective investors and partners about the surgery center, noting that there could be an opportunity for them to utilize and invest in the ASC. They can encourage the new-to-the-area physician to talk with current physician-owners of the center. Physicians can quickly create an open door to recruits just by picking up the phone and introducing themselves.

Don’t just focus on high-dollar surgeons or the busiest surgeons; a physician who does 15 pain cases a month could eventually get to 60 cases a month and these providers are often easier to work with. 

The local administration staff at the center should also watch newspapers and local magazines ads for announcements of new physicians coming to the area.
Surgery centers proactive in their recruitment efforts often provide their physicians with printed information — such as brochures — about their ASC to help with the elevator speech mentioned earlier. Some provide recruitment cards, which are similar to business cards but have the highlights of the ASC printed on the back of the card. These are small and easy for doctors to carry around.

ASCs can also consider using a consistent, direct mail campaign to prospective physicians that alternate between letters from the partners, to brochures, to postcards, all with the end-goal of keeping the surgery center on the minds of the physicians that you are recruiting. This is what we call the vitamin approach or drip marketing. This process sometimes has immediate results but it is designed to improve the other activities over time.

While some of the best leads and referrals come from the current surgeon owners, the most successful surgery centers also tap into other sources such as anesthesia providers, traveling pharmacists and equipment and implant vendor representatives who are in position to provide leads. They can be your eyes and ears. Most people are willing to help — you just need to ask, and ask often. Be persistent.

The healthcare economy demands that we all look at our business differently and, where practical, find better ways to increase surgical volume.  Create a direct-to-patient marketing program. If you have patients that you can refer to the physicians they will be more receptive to doing procedures in your center. This is the next wave in the ambulatory surgery center development.  This can involve making and regularly updating a website, conducting search engine optimization, posting ads in the local newspaper and magazines, billboards, speaking with the larger employers etc. to build patient traffic.

The success of the outpatient surgery centers requires a total “all hands on deck” approach, Complacency and the wrong mindset is a major contributor of the under performance of the surgery center, and the center’s top priority is to ensure that the partners and providers are always engaged.

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Selling My Ambulatory Surgical Center (29)

This goes back to the market – what you want and what market your surgery center fits into.

If your center has an EBITDA of $600K and not really high level executive team, then there is zero reason to go to the ambulatory surgery center private equity groups market. Thus, you would look at the hospital health systems that are in your market area or have a desire to be in your market area. How would you know if they want to be in the market area? Call them; when in doubt pick up the phone and present the teaser. It is a lot of work, but at this stage of the process you MUST create competition. For example, we recently sold a center that had been in conversation with a hospital literally 5 miles from it for a few years. This hospital had not been very helpful in the development of the center by pressuring the docs to not refer there. The hospital made offers a few times and over time those offers were reduced and timelines not met, etc. The physician owner finally engaged us and we created competition for the center through solicitation offers from health systems not in the local market, but with hospitals in the region and we were able to negotiate an increase in sales price of 40% and much more favorable terms with the hospital 5 miles away because they did not want the competition putting a flag down in their back yard. This was a situation where we allowed the rumors to fly because it helped drive up the price and allow us to have very favorable terms. It all started with the teaser being emailed then a follow-up call presenting the teaser.

ASC Management company names are fairly easy to locate. There are about 60 national and regional management companies. They all have websites that have information about them and their investment box, or investment criteria if you will.

If your center scores high as far as the most attractive characteristics and has an EBITDA of a million or more, then the financial control interest surgery center buyers (investors that want to purchase 51% or more) would be in your universe. When in doubt send your teaser out to the CEOs or development executives.

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In the investment banking world we refer to this as selecting the buyer universe. The selection of an appropriate group of prospective buyers and compilation of corresponding contact information is a critical part of the organization and preparation step in the marketing stage when preparing to sell an ambulatory surgical center. The market for ambulatory surgery centers typically consist of physicians and or physician groups, hospital health systems, and ASC management companies. These are broken out into minority buyers, majority buyers, financial buyers and commercial payors.

To be able to define the market of buyers for your specific surgery center you must understand your SWOT (strengths, weaknesses, opportunities and threats). In other words, what you need in a partner, what the buyers within each market is typically looking for, and where your outpatient surgical center fits within what the ASC buyers want.

Remember that buyers of surgery centers that want what you have are the ones that pay the most and offer the best terms.

Physicians and or physician groups

When we speak about physicians as ASC buyers they are either looking for a smaller center that they can buy outright for close to asset value to use as an extension of their practice such as the one room surgery suites, or they are looking to be a minority investor in a center that they will use with other surgeon investors. While some groups of surgeons are looking to buy all of or a majority interest in a larger surgery center, in this situation they typically are looking for underperforming centers that they can purchase for asset value or below. If you need more cases, are selling to retire, or need to sell for defensive reasons, then this is a market for your surgery center.

ASC management companies

ASC Management companies for the most part are looking for centers that they can improve by increasing its revenue and profitability. There are exceptions to this in which a management company is public or is going public and they buy a center that has great cash flow, but is not in a market with significant growth potential and they are in that case buying it for the cash flow, which financially shows growth within their company and looks good to Wall Street.

There are essentially two types of buyers within this market: minority interest buyers and majority interest buyers.

The market for majority or minority interest deals is often dependent upon the strength and the risks of the ASC being sold.

For example, the following characteristics are the most favorable and  frequently published as the desired characteristics:

  1. location within a certificate of need state
  2. low reliance on out-of-network payments
  3. reasonable, but not overly high reimbursement rates per procedure
  4. not overly dependent upon a few doctors
  5. low levels of physician non-competition risk
  6. profitable 

Majority control interest ASC buyers are very interested in centers that rank high with these characteristics. Ambulatory surgery centers that are between 40-50 percent utilized, rank lower on those characteristics and are targets for some of the minority buyers.

There is also a market for ASCs that are losing money; these are minority buyers that specialize in turnarounds.

Let’s say there’s a center owned by five doctors and it’s 50 percent utilized. Rather than selling 51 percent, the surgeon owners would do better to sell 30 percent to an ASC management company that would increase the utilization. Then the surgeon owners can take it and sell it for a much higher value. If you have an unprofitable surgery center, one of the benefits of partnering with a management company that specializes in turnaround projects is that while the existing owners sell a minority share to the turnaround company, there is still potential to participate in a second profitable sale to a majority interest surgery center buyer if and when the ASC becomes profitable. Why do physicians sell minority share ownership of an ASC?

By bringing in a minority owner surgery center management company, the center can take advantage of the company’s recruiting, contract renegotiations, management expertise and increasing revenue and retain the option to sell part of the center for a higher value later on. You can get a much higher multiple and a much higher value for all of the sellers.

Surgery centers that are operating near or at capacity — in the range of 80 percent or so — would be in the market to sell a majority interest to a company that is looking for high cash flow and that has the resources to expand the center.

Selling a majority share in a surgical center is also a good option as an exit strategy for surgeons who are near retirement. This way they will receive full value for the shares they sell rather than a discounted value. The ASC management company or hospital buyer would then recruit younger surgeons to replace the older surgeon owners.

If you need expertise in recruiting, contracting, case costing, billing and collections, A/P, A/R and purchasing, as well as a good purchase price then ASC management companies are a good buyer choice. They are typically able to close a transaction quicker than hospitals.

Hospital health systems

Hospital health systems are looking for everything the ASC management companies are looking for: centers that they can improve by increasing its revenue and profitability. In addition, hospitals are interested in the potential strategic advantage a center could bring to their marketplace. If the outpatient surgical center is owned by high-volume or hard to recruit specialist or noteworthy surgeons in the community, that has significant value to a hospital wanting to align with those physicians. The surgery center would be more attractive if it is within 35 miles from the hospital’s main campus. The surgical facility can receive provider-based designation from CMS. If the surgery center is outside of the 35-mile radius, the hospitals could still be interested if it gave them a foothold into a competing healthcare market and they could keep it a free-standing outpatient surgery facility.

Financial buyer

Financial buyers, also referred to as surgery center private equity buyers or financial sponsors, are typically looking for platform companies or add-ons. If it is a platform company the surgery center private equity groups are looking for an EBITDA of at least 2 million and a surgery center that has a strong management team in place where they can grow the platform through add on acquisitions. If you have a very attractive situation, multiple centers and a solid EBITDA, a financial buyer could be interested in you if they already have an executive in residence, which is an executive with industry experience that they could install as the CEO.

You will sometimes be able to get the attention of some of the smaller financial buyers if you have $1 million EBITDA.

For add-ons, the private equity group already has a surgery center or centers and are looking for ASCs that they can add on to their platform. It could be argued that this is a surgery center strategic buyer, but none the less their criteria threshold is lower than for a platform.

Additionally, if you do not meet the financial buyer’s criteria but you have a very strong management team in place that could take on more responsibility, then a PEG (private equity group) that has a platform with a weak management team could be interested in you.

Commercial payors

For many years the typical owners of ambulatory surgery centers were surgeons, management companies, hospital health systems and financial buyers. The concept of commercial payors owning ASCs is not new, but they are becoming more active. The reason that payors are looking at surgery centers is to secure the lowest cost for outpatient surgery as possible. Operational efficiencies and cost savings are the goals of the payors. So it is important that you know how to market outpatient surgery.

If you are near the maximum capacity within a market with little growth potential then payors or hospitals would be the most viable market for you to sell your surgery center.

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This organization wants to limit your options and remove your greatest leverage tool—competition. They understand that increased demand for any product (your center) will increase the price and decrease their profits. They will even tell you that they will not participate if there is competition for your center. Ask them why they are calling you if that is indeed the case. We have written an article that better answers the questions and can be read here.

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The life cycle of an ASC has the following stages:

  • Startup
  • Initial Growth
  • Rapid growth
  • Slowing growth
  • Plateau
  • Decline

Startup

The startup is the surgery center’s pre-development phase where you are trying to figure out what direction you want to go with your ASC and how you are going to get there. For example you are a group of busy podiatrists and your case volume shows that the pro forma will be below breakeven. Do you go out and recruit some orthopaedic or spine docs and develop your ASC with just surgeons? Do you “sell” at this point in time a piece of the project to an ASC Management Company or a hospital health system?

Initial Growth

Then you have the the initial growth phase, which is a very important stage in your center’s development towards profitability. This is when you set the tone, lay the foundation, and the physician partners and utilizers have their first impression of the operations of the center. Additionally you will be able to address the surgical case load commitment that you based your surgery center’s pro forma off of. Profits will not be there until the fix cost are covered, thus you should focus on working with the surgeons to capture the surgical volume that you put in your surgery center’s business plan’s pro forma, on operational efficiencies and containing cost. If your doctors are not aggressively shifting cases to your center you need to address it in this stage.

You need to be working towards your surgery center breaking even as quickly as possible. That being said, you should look to see if you need to be open every day or not, have minimal staffing, and recruit more surgeons that will do cases in your surgery center. There are outpatient surgery centers that are 4 or 5 years old and are not out of this stage of development. So it is important that you know how to market oupatient surgery.

Rapid Growth

In this stage you are covering the ASC’s fixed cost, have worked out the operational inefficiencies and working well with the surgeons. You are making consistent surgery center distributions and your EBITDA is expanding with each added case. As we have said many times before, once you are at break even every dollar of revenue should add between $.65 and $.85 to the bottom line.

During this expanded growth phase is where the fun begins or everything that you worked towards moves faster. Your hard work and strategic operations are paying off with results. The profits are being driven by the core surgeons.

Slowing Growth

While surgery centers can go from the Initial Growth stage to the Slowing Growth stage, skipping the Expanded Growth stage it is more than likely to happen as you capture the majority of the surgical cases that the original surgery center partners and utilizers of the ASC have. So it is possible that slow growth happens at any time in the ASC growth cycle, but most likely after you capture most of the surgical cases from the original physicians. This is when the growth slows down, the excitement is gone, the partnership matures and partners begin to decrease the number of new cases. The business’s best practices get overlooked and cost containment does not occur. This very often happens when the team forgets about the fundamentals and thinks that the rapid growth is never going to slow down.

Plateau

At the plateau stage of your ASC you are having challenges, everything has stalled, and you have an administrator with a good bit of complacency at best. Partners are disconnected and the partnership starts to break down.

Decline

As the stage name states, you center is in a state of decline. Partners are bringing cases other places, you have a tough time getting people to show up at the meetings and partners are complicated and disengaged. You will need a turnaround specialist because if you get to this stage you have missed the ability to capture the best value the surgery center once had to offer.

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The price by which an outpatient surgical center would sell is based off of the center’s profitability and growth prospects.

If you look at the life cycle of an ASC, you are most likely in the rapid growth phase, which eventually will only slow down and start to decline, thereby eliminating your opportunity to get the best possible price for your center.

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Let’s look at this answer as it pertains to each of the stages of the ambulatory surgery center cycle, with selling the surgery center as the end in mind. It depends on what you want at the end of the day. Is your goal to build a center where you can have a significant liquidity event? Or do you want to use the ASC as a profitable tool? Keep that in mind as we go through this process.

Your main question is how to sell my surgical center? In this case, selling an ASC refers to taking on investors that are not physicians. Thus you are selling a good portion of the business or taking on non-physician investor partners.

Common reasons surgery center surgeon owners sell include a desire to diversify assets, reduce exposure to debt guarantees if the center is not performing well, gain strategic benefits from some buyers, such as a hospital’s ability to increase reimbursement or recruit, and to acquire advantageous tax rates from the liquidity event. That is, owners are taxed at the rate for capital gains today rather than the tax rate for their future income over time, which is higher. There are certainly a number of advantages to aligning with a corporate partner: professional management, access to capital, greater focus on growth and realizing a return on your investment.

Selling in the Startup Phase

This is the pre-development phase where you are trying to figure out what direction you want to go, or can go for that matter. The main reason that you might want to bring on a corporate partner or hospital health system during this stage is to diversify your risk. From a pure financial perspective it is much more financially beneficial for you to hire some consultants to help you develop the center and an investment banker to recruit the physicians and sell them shares in the company, than to join with a corporate partner.

The reason is that when you build the business up and once you have done all you can do and growth is moderate, you can then sell it for a multiple on the profits, whereas in this stage the corporate partners would pay the same as you do to get in the project and then almost always require a management agreement where they would take a percentage off the top. Now there are some other reasons that you might want to join a partnership, such as better reimbursement to the surgery center from non-governmental payers than the center could have negotiated on its own, but a lot of startup ASCs depending on the market still start out of network and leverage that process to get good in network contracts or access to start-up capital, but with a solid group of docs to start this should not be an issue. You might also consider a corporate partnership for development expertise, but you could get that with consultants.

Selling in the Initial Growth Phase

The initial growth phase is when you set the tone, lay the foundation and the physician partners and utilizes have their first impression of the operations of the center. Profits are not there until the fixed costs are covered, thus you are focused on working with the physicians to capture the surgical volume that you put in your business plan’s pro formas, and on operational efficiencies and containing cost. You are working towards breaking even as quickly as possible.

There are some centers that are 4 or 5 years old and are not out of this stage of development. Depending on the reasons you are unable to get your fixed cost completely covered you might think about selling in this stage of the process. This really is not a good time to think about selling because you have taken on all the work and risk to get it up and going, but again some people really need operational help and case recruitment help that a hospital health system or ASC Management company might provide. Additionally, sometimes selling a large share of your ASC to a large group of physicians and allowing them a significant leadership role in the business is beneficial if you are unable to get it out of this stage.

Theoretically, you could actually end up paying someone to take a position in your center at this stage. For example if you are not at break even and have significant debt an investor would look at your center from the start up cost or asset valuation method. They would take on pro rata debt and require a management agreement where they take a percentage off the top line. For example, one ASC had only a couple of high volume surgeons and that relationship broke down and became very ugly. In this case the partner needed to be bought out and taken off the debt. Thus you might not have an option but to sell to a deep pocket investor. Another situation could be that you find yourself without the expertise to get it though this stage to the next. It would be better to take on some operational expertise or a group that has the case volume that you need at this point before you have to infuse the ASC with a significant amount of capital to cover the debt service. Again, if you have some capital that you could invest in hiring a company such as ours, depending on the market, it would be better financially speaking to do that compared to selling an equity position to a management company.

Selling in the Rapid Growth Phase

This expanded growth phase is where the fun begins or everything that you worked towards moves faster. Your hard work and strategic operations are paying off with results.

Centers that obtain the highest sale prices are the ones that have strong, sustainable and growing earnings. The multiple will decrease if there is limited growth opportunity from existing partners, if there are few recruiting prospects or if there are capacity concerns. Capacity concerns questions whether the physical space allow for expansion or added cases. The multiple will increase if your center consists of partners with growing practices, if there are enough recruitable surgeon prospects, and the physical capacity to add cases and a diverse procedural mix. Investors look at two types of growth when defining growth — internal and external. Internal growth would come from cases from the existing physician partners; external growth obviously would come from cases added through new physician partners.

Some of the reasons that you might want to sell during this phase:

  • Liquidity event
  • The distributions that you are receiving are taxed as ordinary income whereas the sales proceeds more than likely would be taxed as capital gains.
  • You would receive the present value of future cash flows.
  • You can decrease your liability or risk to the future cash flows.
  • If you sell your surgery center towards the end of this stage or the beginning of the Slowing Growth phase-as long as there is moderate growth and some other factors you are likely to obtain the a high sales prices but you could with some help expand this stage and work to increase your earnings and the ASC sales price.
  • Obtain Management/Business expertise from a strategic buyer.
  • Physicians are tired of managing.
  • Corporate partner focused on future growth and bring in new surgeon partners.
  • Leverage with supplier, payers and other synergies.

So it depends on a whole host of items but if you do sell in this stage you want to sell towards the top of this stage where the profits are close to peaking. Additionally I would stress to you that this is, if you have the physical space capabilities, a great time to look at your best practices and payor contract as well as execute a strategic ASC resyndication plan so you can expand the rapid growth cycle and capture that increase in profit when and if you choose to sell.

Selling in the Slowing Growth Phase

This is when the growth slows down, the initial excitement is gone, the partnership matures and partners begin to slow down the number of new cases added. Things are taken for granted, The business best practices get overlooked and cost containment is not looked after. The reasons that you want to sell in this cycle are similar to the upper end of the previous expanded growth stage.

  • Liquidity event
  • The distributions that you are receiving are taxed as ordinary income where as the sales proceeds more than likely would be taxes as capital gains.
  • You would receive the present value of future cash flows.
  • Can decrease your liability or risk to the future cash flows.
  • If you sell towards the beginning of this stage or end of the expanding growth stage because you are likely to obtain the highest sales prices but as we mentioned you could with some help and work expand this stage.
  • Obtain Management/Business expertise from a strategic buyer.
  • Physicians are tired of managing
  • Corporate partner focused on future growth and bring in new surgeon partners.
  • Leverage with supplier, payers and other synergies.

I would state that as long as there is moderate growth you should do well with the sales price. Thus you would be best suited to sell in the early stage of the slowing growth cycle. Again if you have the physical space capabilities, this is when you need to look at your business best practices and payor contract, be an expense hawk as far as staffing levels and cost, supply cost as well as execute a strategic surgery center resyndication plan so you can expand or slow the slowdown of your surgery center and capture that increase in surgery center profits when and if you choose to sell your ASC.

Selling in the Plateau and Decline Phases

At the plateau stage of your ASC you are having challenges, everything has stalled, and more than likely you have an administrator with a good bit of complacency at best. Partners are disconnected and the partnership is showing signs of breakdown. If not addressed now, your challenges will quickly move you to the next stage which is the stage of decline.

The reasons that you would want to sell in the plateau stage and decline are similar. Typically the physician owners are burned out or were never able to get the center to perform up to expectations. You need help in the business best practices, payor contracts and physician resyndication and management of the surgeons. Oftentimes you will need a change in leadership, a re-allocation of ownership, and to redeem non-participating surgeon partners or underperforming partners. You really need a ASC turnaround specialist and have missed the value capture that you wanted.

Additionally, sometimes the best surgery center exit strategy is to wait and hold the surgery center. If all the owners are committed and working to maintain high clinical standards, bring in new surgeons and procedures, improve payor contracts and cut expenses, most of the time you can achieve and expand the surgery center growth.

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Great question. You want to consider selling your ASC when an outside investor can add the most value to the partnership and right as you are peaking with what you can do with the center. This can occur at different stages for different surgery centers. There are buyers and sellers at all stages. It is tough to anticipate a future decline in business, so it is necessary to determine where the surgery center business is and where it is headed. Easy right?

I recommend that you think of your ownership shares in your surgery center as you would shares in NIKE, Facebook, GE, etc.; value can go up or down almost anytime.

Let’s take a look at the thought process in a more strategic fashion. What we do if we are brought in early enough in the decision making process is to recommend doing a SWOT (Strength, Weakness, Opportunities, Threats) analysis. There are others that you could use to get to the same place, but it is the one most of us have heard about and it is fairly easy and straightforward.

A SWOT analysis guides you to identify the positives and negatives inside your Ambulatory Surgery Center business (S and W) and outside of it in the external environment (O and T). This will help you to develop a full awareness of your situation, which will help with creating a plan and making the decision. Do you hold or sell, and what is your path forward if you sell or hold?

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, and what are the opportunities and threats facing it?

Some of the elements typically found in a SWOT for a surgery center:

Strengths 

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

Weaknesses

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

Opportunities

  • Ability to take on more cases or expand
  • Improve payor contracts (e.g. an ASC that sold with payor contracts at 100% of Medicare. This was a huge buying point for the strategic buyer because it was an easy opportunity to increase revenue shortly after they bought the center.)
  • Recruitable surgeons in the market
  • Lower expenses
  • Improve business best practices
  • Internal cases that can be brought to the center
  • Able to establish a direct to patient marketing program

Threats

  • 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.

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Since we know that your ASC is worth the most when you still have moderate growth, so it would be at the top of the expanding growth stage or at the beginning of the slowing growth stage. The market has recruitable surgeons, and your center can take on more cases or has excess capacity if you have to expand your day and start surgeries at 6 am and stop them at 6 pm or expand your week and do cases on the weekend. We will assume for this question that your desire is to maximize the sales price and sales terms to you and your partners and to take on a partner that will be a good fit and increase your profits.

So all of that is straightforward and an easy concept. The tough part is, when will we know all of this? When we go through this process with a specific client we would conduct in-depth interviews with the owners to get a better understanding of what they want and what they are willing to commit to in order to get there, as well as the due diligence of the center’s business. We would then lead them through SWOT analysis that would help us understand what paths to discuss.

Your weaknesses and opportunities in addition to what you are willing to commit to is really what determines the answer to the question. You will then determine from that process if you have the desire to execute on some of the strategies that will take advantage of some of the opportunities that have been identified in order to expand the rapid growth cycle and slowing growth cycle.

In the event that you are unwilling or unable to expand the rapid growth stage of your surgery center, it does not have to be a “do it yourself” project, so that would be an ideal time to sell. If we execute the plan that is produced from the above, then the ideal time would be to sell after the changes have been made and the newly recruited surgeons have seasoned a little while.

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Yes of course there are less optimal times to sell you ASC.

From the financial sense if you are still growing rapidly, recruiting new surgeons or have the market that would allow with some help that growth, then it is in your best financial interest to capture that growth before you sell. In other words you really do not want to sell your surgery center before the timing is right regardless of what stage your ambulatory surgery center is in. Sounds easy….the challenge is that there are some variables that are unknown in that formula without a crystal ball. So it is no different than making a surgical decision, you have to look at the situation in its entirety, analyze your ASC first-do a Ambulatory SWOT analysis (look at yours and the market’s Strengths Weaknesses Opportunities and Threats)-then look at and pay close attention to your weaknesses and opportunities. This will drive your decision. Make a professional judgment and decision and then execute on that decision.

Examples of bad times to sell were bad times because we had to sell the ASC. If we were advising the centers earlier on in the process, we would have taken a different direction with the benefit of time. One time a surgery center’s majority owner, who was a surgeon, called 9 months prior to us working with him and in reality it was too late 9 months later. When he first had called us and we discussed the situation in depth, we recommended that we work together to syndicate and recruit more doctors and then add an ASC management company or hospital partner. At that time we assumed that the cost of that process was a barrier, but he called 9 months later with significant issues hanging over his head. We told him that we really did not want to get involved, but he literally begged us to help him. We explained how difficult given his timeline that it was going to be and that we would not get to where he wanted to get, but we ended up taking him on as a client. He ended up having to sell his CON and assets just to mitigate his damage.

So the answer is that the bad time to sell is when you wait until you have no other option but to sell or in other words when you are forced to sell. This can happen if you are not a realist and are not able to realistically look at your SWOT and understand that either you have some weakness or your market does and you need help shoring up those weaknesses. People do this by blaming external factors when a lot of times the majority of the issues in under-performing surgery centers are internal. Thus timing is a big key and you need to be constantly evaluating your strategic options and executing your plan. If buyers do not add value that you can capture, then it is a less than optimal time to sell.

When a company is at about 70% capacity, profitable and growing, it is the perfect time to sell. The highest premiums are obtained when you are still on an upward track, rather than at your peak or declining. It is also worth considering selling a portion of your center (recapitalizing) when the value is high, and sell the remainder when the center peaks. This can diversify your risk and take care of you and your family for the future.

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The actions that buyers of your surgery center would look at and possibly make adjustments to for improvements all relate to value drivers. More specifically they will look for every way to decrease cost, increase revenue and increase efficiencies.

Even in the most advantageous market, many owners of ASCs leave substantial money on the table when they sell their surgery center — most often because they do not truly have a handle on what they can do to maximize the multiplier basis (the metric buyers use to multiply and get a final price) or they don’t want to invest the required time and effort. However, the buyer will take the time and effort to make these changes after they purchase your center. So the question is do you want a multiple of the profit derived from the changes or do you want a percentage of those changes that you will get after the buyer makes the changes?

Examples:

  • Look at your staffing levels and cost right size that.
  • Look at your cost per OR min and see if you can gain any efficiencies there.
  • Supply cost-surgery centers can reduce surgical supply costs by consolidating suppliers. As a standalone center you can push for price reduction, but an investor that has multiple surgery centers can typically get a better supply cost. You want to perform an analysis on the different suppliers currently used at the surgery center, this will help the materials manager identify which cases use the most supplies — often also the cases that are performed most frequently at the center — and work on cutting the number of companies from several down to one or two if you can get that price down by doing so. You need to know what you are spending per item for surgical cases. Many centers don’t track spending levels deeply enough and as a result there are lost profits. Physician preference items often cost the surgery center a great deal if the physicians don’t partner with the ASC to reduce materials costs. Make needed adjustments. As you determine which suppliers have the best deals, work with surgeons to consolidate their preference items for the lowest cost high quality provider.
  • Benchmark your costs against yourself and others.There are many benchmark surveys for most of the categories that you can turn to if need be.
  • Renegotiate your lease on the ASC space, equipment etc.
  • Renegotiate vendor agreements-all of them!
  • Renegotiate third party payor agreements-even if you have a year left.
  • New cases are the lifeblood of a successful ASC. Ask each partner and physician that is doing cases in your center if there are any cases that they could bring to the center that they are currently taking somewhere else. Then ask then what you could do to make them feel comfortable in bringing those cases to the center. I would also create a spreadsheet that lays out what a few more cases-use the cases that each surgeons is currently doing and the payor mix, would mean to the bottom line of the surgery center. You want to capture all the cases that you can and that add to the profitability of the center. This would increase the value for the buyer after the sale or the sales price for the physicians.
  • Recruit new physicians and syndicate. Buyers understand that physicians and referrals are central to the success of any surgery center. ASCs that attract additional physician-investors will capture the revenue from other centers. ASCs that have the right mix of physicians could lead to a boost in earnings, which will in turn increase your valuation, thus achieving a significantly greater acquisition price. Look to existing specialties and the partners of existing physician-investors; they should already be familiar with your facility and board members, and might be more open to joining you in short order. After that move to competitors of existing partners, this might be controversial to some but the competitors are valuable targets.
  • Is there a local competitor that you could merge with? If you have two centers that treat patients in the same market, think about merging the ASCs with the combined revenue and significantly reduced overhead.

With the right staff or consultants you should be able to carry out some, if not all of these things. Doing these will help you better convey your unique story. Additionally this will help you make your argument through the Discount Cash Flow Model, a Gordon Growth Model or some hybrid thereof. This is a picture of the present value of future revenues or future revenues in its present value.

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When you think about selling your ambulatory surgery center, you as the surgeon owners 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 surgery center business, etc.

In order to put your surgical center business in the best position possible to reach those outcomes you must work hard in preparing your surgery center for sale. The goal of the prepare to sell stage is to prepare you surgery center so 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. Surgery center buyers and ASC 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 it in a multidimensional manner.

Some of the goals are to:

  • Increase the speed of the process
  • Make the process more efficient
  • Manage and increase the overall perception of the buyers (which directly affects the value)
  • Learn as much about your business as you can

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 and case or procedural concentration, contingent liabilities and any physician partner issues.

You need to understand the assumptions that drive your surgery center’s 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 surgery center’s 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 ASC buyers will use in their analysis (comparable companies, precedent transactions, multiples of trailing EBITDA, DCF analysis and sometimes LBO analysis-which is using debt)

The more questions that you answer upfront the fewer you must answer during the process to get the surgery center buyers familiar with your ambulatory surgery center’s story. The longer your surgery center business is on the market the easier it is to lose momentum. Time kills deals, speed matters, thus this process matters.

Efficiency.  The more information you provide the buyer the more quickly they can determine their interest level in the opportunity. No surgeon owner wants to waste time educating a potential buyer on their business only for the buyer to indicate they are not interested. So the sooner you can help some of the buyers to screen themselves out, the better. Use this process to help you decide which buyers to spend time with and ignore the rest.

Buyer perception. Surgery center 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 surgery center 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 surgery center HAS made them and how great the ASC is but buyers only care about past performance to the extent 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 the downstream benefits such as a hospital wanting the alliances, buyers may not see the value to them. One of your goals is to get to know your surgery center and local market so you can convey to the potential ASC buyers where the surgery center’s growth will be. You need to show the investors how far you’ve taken the surgery 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 ASC will not be known to the buyers which in turn will equate to less interest and or less money for you when you sale your surgery center.

It cannot be stressed enough-buyers are looking for future value when purchasing or investing in your surgery center.

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Whenever you start the prepare to sell process or even a little before you need to understand the physician owner’s and the ambulatory surgery center company’s 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 or in other words sell your surgery center, the strategic position of the surgery center in the market place as well as understand what you need in a new partner. Additionally, know what you want out of a ASC sales transaction. We can discuss some of the typical wants, needs, and desire but this is mostly very center and owner specific.

We ask each surgery center partner what they want to see in a buyer and what they want out of a sale of their surgery center. This helps get a handle on the questions, but also helps with physician buy in.

We 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 decision making process is to recommend doing a SWOT (Strength, Weakness, Opportunities, Threats) analysis. There are others that you could use to get to the same place, but it is the one most of us have heard about and it is fairly easy and straightforward.

A SWOT analysis guides you to identify the positives and negatives inside your Ambulatory Surgery Center business (S and W) and outside of it in the external environment (O and T). This will help you to develop a full awareness of your situation, which will help with creating a plan and making the decision. Do you hold or sell, and what is your path forward if you sell or hold?

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, and what are the opportunities and threats facing it?

Some of the elements typically found in a SWOT for a surgery center:

Strengths

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

Weaknesses

  • Low volume
  • High Debt
  • Disengaged partners
  • Low paying contracts
  • Over built center

Opportunities

  • Ability to take on more cases or expand
  • Improve payor contracts (e.g. an ASC that sold with payor contracts at 100% of Medicare. This was a huge buying point for the strategic buyer because it was an easy opportunity to increase revenue shortly after they bought the center.)
  • Recruitable surgeons in the market
  • Lower expenses
  • Improve business best practices
  • Internal cases that can be brought to the center
  • Able to establish a direct to patient marketing program

Threats

  • Competing Hospitals
  • In office procedural room
  • 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.

We would look at needs, as in a buyer that could help shore up weakness and threats as well help execute and take advantage of opportunities. For example, in one surgery center that we worked with a hospital health system kept selling us on their ability to leverage their contracts etc. While that is great, in reality we need help with case load recruitment-more docs, thus unless they can prove that they can help with case load recruitment that does not fit what the center’s needs are.

If you are a well-oiled, well-run larger surgery center, more often than not you just need a solid partner that can pay the most…right?

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It cannot be stressed enough how important it is to have candid and open communication with all parties. Deals have blown up at the 11th hour or in the red zone (to use a football term) because of trust, when it could have been prevented with better buy-in and consistent OVERcommunication.

Some of the pros to selling your surgery center (a huge part of getting partner buy-ins): 

  • Convert future income into today’s dollars with advantageous tax rate-pay capital gains rates today rather than income rates over time.
  • Take money off the table and diversify your investments.
  • Reduce your risk exposure and debt-no one has a crystal ball to see what the future holds, all business ownership carries risk.
  • Better management, contracts, pricing, improved physician recruitment, efficiencies.
  • In some cases you get your life back, meaning someone else is responsible for the IT problems, personal problems, replacing that nurse of office staff, etc. and you can concentrate on practicing medicine.

Some of the cons of selling your surgery center are:

  • You are no long the only decision maker; now you have a corporate partner.
  • Have to pay management fees, and in some cases pay even if you are not making a profit.
  • You have to share the future performance of the center.
  • You might have chosen the wrong partner and they may not benefit you long term.

You need to speak with the partners and discuss the pros and cons of selling your ambulatory surgery center and keep them informed throughout the process in order to keep that buy-in. This needs to be spoken about early on and not held until later in the process or it can kill the deal. Buyers want partners who are serious about the transaction, can make decisions and know what they want and do not want. Do not wait until you are in the negotiation stage to educate and get the buy-in of your physicians. You do not want them learning about this piecemeal though half-true rumors, which leads to assumptions and problems.

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Physician owners of ambulatory centers are very intelligent and accomplished professionals, but in general will likely only complete one or two sales transactions in the course of a lifetime. Yet those deals will probably be the largest and most significant financial sales transactions of their career. So by definition, the inexperience of these essentially novice surgery center sellers can prove financially catastrophic as they negotiate with a surgery center buyers’ full-time, professional M&A team. Additionally there are many implications that you will encounter, such as legal and tax, not to mention the negotiation strategies and business implications. Having the right advisors upfront can help you structure the transaction whereas to mitigate or lessen them

You should have a team that consists of the following:

  • Transaction Accountant
  • Business accountant
  • Transaction lawyer
  • Industry specific Investment Banker
  • Key member(s) of your management team
  • (If you are a larger group of surgeon owners then a transaction committee that is empowered by the group of owners)

Let’s speak briefly about the why behind the group and their roles. You should engage your accountant and a transaction accountant. They might be the same person, but oftentimes not. It is important that you seek out an accountant with significant experience with business transfers. I do not believe that they need to have specific ASC transaction experience. You need one who understands the different methods that you can use to transfer the business and the tax consequences of each. Your current accountant might know some, but do they know enough to make strategic recommendations? Do they understand the tax consequences around the allocation of the sales price? While we as investment bankers understand the tax implications and deal structure because of our experiences and finance education, we will point you and your accountant in some directions; we do not offer tax advice.

While it is very possible that you have healthcare lawyers that you call on often, you need to make sure that you have an attorney on your team that is very experienced with surgery center business transfers and the associated deal documents, and more importantly has the temperament to make sure the deal does not stall because they want to argue and debate issues that are not very important or worse allow their ego to get in the way.

Some articles attempt to tell physicians owners that they do not need a broker to help them sell their surgery center because the buyers are readily available. The authors of that must have only had experience with or exposure to some business brokers that only fax out a one pager on your center and then get out of the way. These are not the ones that you want or need, but industry specific investment bankers earn their fees multiple times over in multiple ways. We work with our physician owners from understanding the value drivers to making adjustments to their center’s business, capturing internal cases and re-syndications, defining the market for the center, identifying the buyers within each market, crafting the message that puts your center and its growth in the best light, marketing the center, and negotiating price and all the deal terms. Even if it’s not us, you need someone carrying your flag and negotiating your deal.  Most of the time this is very personal for the sellers and less so for the buyers’ experienced full-time deal team thus sellers sometimes need an advocate for the deal that represents the best benefit for them. You need to look at the investment banker’s strategic thinking, negotiations abilities and experiences in the surgery center space.

You will need someone from your senior operations team to be the point person within your center. This person will be the one that collects and provides the due diligence request. If you have a large group of physicians owners it is imperative that you get their buy-in, but it is too time consuming to get permission from each partner every step of the process. Thus we always recommend that you set up a small sales transaction committee. Obviously if you have a small group that would in essence be the transaction committee.

If you are doing some complex adjustments such as a syndication prior to the sale of a center, depending on the buyer and how the negotiations go you could need a third-party valuation in order to justify the price that is negotiated. While we as investment bankers can do some of this, know that our job is to maximize the sales price and are seen in that role, while an independent third party valuation professional is not typically seen in that manner. We can make referrals to the outside professional if needed.

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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 persons, like underwrites, 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 or acquire the company, what terms and for what prices. Additionally, this allows you to get a very deep and wide understanding of your business because you must be able to present your business in the most favorable light.

The goals of the prepare to sell my ASC stage is to prepare your surgery center 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. Here is how we get a handle on that. Being organized and proactive vs reactive helps those three things happen. This also allows you to get in front of any potential weaknesses that you might have or see and allow you to craft the message around the options you see around how these could be strengthened.

Stage one 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 our experience and we are 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, sometime depending on the size and scope of the business we are selling and the buyers we will actually combine the stage one and two but with them broken out you can wait to give more information as you get more comfortable with knowing that the potential buyer is a real buyer.

Stage one

  1. Physician Information:
    1. Curriculum vitae with D.O.B.
  1. Corporate Entity Structure:
    1. List of all shareholders.
    2. Percentage ownership by type of security.
    3. 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.)

  1. Financial Statements:
    1. Annual statements (P&L and balance sheet) for 2006, 2007, 2008, and 2009.
    2. 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.)

  1. Monthly Production & CPT Billing Reports for 2006, 2007, 2008, 2009 and YTD 2010:
    1. Monthly charges and utilization by CPT code, consolidated by physician.
    2. Monthly charges and utilization by CPT code, consolidated by practice.
    3. 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.)

  1. Description of Case Referrals – Breakdown for last 12 months of:
    1. Number of cases sent by each referring physician indicating physician zip code.
    2. 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.)

  1. Fixed Asset Detail:
    1. Description of each piece of equipment including manufacturer, model, serial number, manufacture year, year acquired, purchase price, depreciable life, depreciation methodology and book value.
    2. Description of maintenance contracts for equipment including name of service provider, term of agreement and monthly cost.
  1. Personnel Headcount:
    1. List of employees indicating position, salary, and hours worked per week.
  1. Real Assets and Lease Terms:
    1. Description lease commencement date, term, monthly lease obligation, gross or triple net, square footage, leasehold improvement, if any.

Description of building, if owned, with construction year associated debt.

Stage 2

  1. General Corporate Materials
    1. Schedule of all shareholders with percentage ownership by type of security.  Summary of any agreements relating to voting of securities.
    2. Schedule of all legal entities (including parent, subsidiary and affiliated entities).
    3. Schedule and description (specifying among other things, any voting or economic rights) of all equity or equity-linked securities issued by the Company.
    4. 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.
    5. Names under which each Seller does business or has done business within the past five years.
  1. Financial Information                                               [Note: MS Excel format is preferred]
    1. Annual financial statements for the last three full fiscal years.
    2. Monthly interim financial statements for the last three full fiscal years and year-to-date period (“YTD”) for the current year.
    3. Schedule of monthly cash collections for the last three full fiscal years and YTD period by payer type supported by bank statements showing funds flows.
    4. 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 period.
    5. Accounts receivable analysis and aging by payor for the past two years.
    6. Detailed fixed asset ledger, with cost, life, annual depreciation expense, accumulated depreciation, and net book value.
    7. 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).
    8. Reports, studies and plans prepared by management or consultants on the Company’s business or financial condition.
    9. 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.
    10. All analyses of the Company or its products prepared during the last 3 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.
  1. Operating Data                                              [Note: MS Excel format is preferred]
    1. Monthly patient volume data by modality or CPT code for the last 24 months.
    2. Patient referrals by zip code for last 24 months.
    3. Patient referrals by referring physician for last 24 months.
  1. Competition, Marketing and Sales
    1. 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.
    2. Marketing plans describing company strategy, marketing and selling strategies, positioning objectives, competition, market share, physician referral base and prospect base.
    3. Copies of descriptive literature concerning business and products, including catalogs, brochures, marketing presentations, flyers, etc.
  1. Physician Relationships
    1. 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.
    2. Any and all physician supervisory agreements including medical director agreements and/or agreements with physicians to serve as the supervising physician.
    3. Any and all interpretation (professional reading) agreements between the Company and any other physician, physician organization or hospitals.
  1. Agreements
    1. 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.
    2. Commercial space leases, ground leases, option agreements.
    3. 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.
    4. Employment contracts/personal service.
    5. 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.
    6. Management agreements.
    7. Medical director agreements.
    8. Billing services agreements.
    9. Service and maintenance agreements where the annual service charge is in excess of $5,000.
    10. Purchasing contracts and/or supplier agreements.
    11. 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.
    12. Managed care and other private insurance contracts with a list of 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.
    13. Confidentiality agreements.
    14. List and description of all significant oral contracts and commitments.
    15. [if wholesale] 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.
  1. Staffing
    1. Management structure and organizational chart.
    2. 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.
    3. Job descriptions for all personnel.
    4. Employee handbooks, guidelines and bulletins.
  1. Medical Equipment
    1. Summary of equipment purchases and leases, upgrades and divestiture history including dates and capital expenditures.
    2. 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.
    3. 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
    4. 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.
    5. Copies of the service records of all equipment.
    6. List of locations of equipment.
  1. Insurance
    1. A schedule of all insurance coverage (including general business and professional liability).
  1. Real Property
    1. Summary of major properties owned or leased.
  1. Regulatory & Licenses
    1. 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
      • Certificate of need (CON) or similar reviews
      • Letters 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
    1. Good standing certificates, for state of incorporation and every state and foreign country in which the Company is qualified to do business.
    2. Copies of any quality assurance accreditations from JCAHO, ACR, ACRO, ACOS, etc. 
  1. Legal & Compliance
    1. 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.
    2. 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.
    3. Company’s compliance plan or program and copies of compliance meeting minutes for the past twelve (12) months.  Please identify the person(s) performing the functions of:  Compliance Officer; Privacy Officer; Risk Manager; Quality Assurance Officer; and Quality Improvement Officer.
    4. 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).
  1. Joint Venture, Partnership and Minority Interest Information
    1. Summary of joint venture or partnership agreements and contract terms, including termination dates.
    2. Summary of management services, billing services and technical assistance, maintenance or support agreements.

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Here are some things that kill deals:

  • Time – taking too long (addressed by being very prepared when selling your surgery center)
  • Not knowing what you want (unable to make a decision)
  • Unrealistic expectations
  • Not knowing the market
  • Arguing over positions rather than working to find a way to get the deal done
  • Not having your physician partners bought in
  • Not having open communication (kills the trust factor)
  • Not disclosing potential snags early on or trying to hide issues – buyers will find out all the problems during the due diligence process and then the seed of doubt could creep in
  • Coming to an agreement on deals terms then wanting to change them later

For example, one client seller got information from their lawyer that the prevailing multiple for surgery centers was 5-7 times. The problem was that the lawyer understood that it was 5-7 times of EBITDA for 50% of the company. Think about that: 5-7 x of 100% of EBITDA for 50%, which in reality would have made it 10-14 times EBITDA. We had an early LOI come in that we thought would be solid with some negotiating, but because it was not 10-14x, the main selling doc dismissed it as a bad offer and did not want to discuss it. We spent the next 4 months collecting other offers and speaking with other buyers just to allow the market to educate the client. Luckily we knew that the first LOI was solid and continued to engage the buyer to keep them engaged and wanting the deal because we ended up selling to that buyer. Know the market because not knowing kills deals.

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Great question. A value is for a certain point in time and your center is worth as much as someone is willing to pay for it. If you are looking to maximize your value capture and the terms of the deal, you would conduct what Investment Bankers term the Broad Auction Approach. I typically stay away from the word auction with buyers because the word is what is it is and it sometimes elicits a negative connotation in their mind, but they are smart people and know what we are doing.

You would prepare your center then go to market with it. Market it to every conceivable buyer and buyer type for centers like whatever center you are marketing.

This process would help you learn the answers to your questions. While granted this process takes a little longer, you will get the answers to your question.

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Underperforming physicians are a problem in most centers. Once upon a time, a surgery center had 20 to 30 partners, but only a few were truly committed to the ASC and used it exclusively for their cases. Times have changed and those committed physicians are increasingly getting upset with the underperforming physicians and those underperforming physicians reduce the value of the surgery center in the eyes of the buyers.

Even though we are discussing this in the context of preparing your surgery center for sale, we believe that you need to constantly reevaluate the ownership structure of your facility to reflect its current users. This will help keep the incentives of the owners properly aligned to maximize the ASC’s value, which puts your center in the best light for an acquisition.

Fairness and group persuasion might be the best and easiest ways to convince partners to sell some or all of their shares. Have someone, or a group of someones, approach the offending physicians and ask them to sell their shares. There are two ways to redeem the outgoing physician’s shares.

  • An existing physician or physicians can purchase  them.
  • The ASC can purchase the shares from the selling physician. When the ASC is buying back the shares, it typically holds them until a new physician-investor is identified, and then the ASC sells the shares to the new physician.
  • A new physician-investor can purchase the shares directly from the selling physician.

Most ASC documents have agreements in them whereas all partners must fulfill the one-third test, which means that for a physician owner, one-third of his income derived from performing outpatient surgery  must be performed at the surgery center in which he has an ownership stake. The ASC safe harbors. If the physicians are not adhering to that, the typical agreement allows for removal for non-compliance by some method.

Additionally many ASC documents have the “no cause” termination or defaulting partnership provision within them, enabling a vote be it the board or a supermajority of owners (usually 65 percent to 80 percent) to remove an owner for any or no reason or because of a defaulting event.

If your operating agreement doesn’t contain any of these and you are looking at this in the preparing to sale context, you should be able to squeeze them out by their paying FMV for their shares and not being allowed to be part of the new company that you would create with the buyers and with the docs that are committed to the surgery center.

Remember, this is general information and you need to be working with your lawyer to execute this.

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To sell a surgery center it requires an agreeable willing buy and an agreeable willing seller at closing. We use to say a willing buy and a willing seller, but that is the conceptual world, because they are willing under their terms or their definition of fair deal.

The prospect of selling a ASC with heavy out-of-network depends on the center, the market and state the center is in, and the earnings level of that center.

There are buyers and sellers of out of network (OON) centers. Some of those buyers will take the most conservative route and normalize the case rates to the in network rates and then value that pro forma from there. Some will increase the discount rate in the DCF modeling and then some will just slap a reduced multiple of EBITDA on it. The amount of discount is the difference among the strategic buyers. From the standpoint of an investment banker we must work hard to understand the “story” both historically and future in order to be able to convey that message and in turn work to keep the discounting to a minimum.

So there are some buyers that are more aggressive and willing to look at out of network centers in a more positive light but those are getting harder to find. If the center is in a market and state that has not been aggressive towards OON-Such as Texas, and the payer mix has a higher percentage of traditional PPO insurance then the prospects are still solid.

If the center has a very large EBITDA then it will catch the attention of the private equity group buyer universe. PEG buyers that are doing their first healthcare deal are less likely to apply as high of a risk discount to the out of network revenue.

The biggest challenge with out of network surgery center transactions is the worth or value or pricing of the deal. So if the willing seller is willing to take the discount then the prospects are very good, but if they are less willing to take the haircut then prospects are less than 5 years ago, but it is solid with the right ASC profile, market and buyer universe.

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For us, expectations equal goals.  Some of the goals that sellers want are peak price and terms as well as a partner that will help grow their business. In order to be able to accomplish those goals, the sellers should expect and be prepared to create a strategic and PROACTIVE sales process and then execute on that process. This will put them in the best position to obtain their expectations. A proactive process will increase the speed, make it more efficient, and manage and increase the overall perception of the business in the eyes of the buyers-which directly affects the value. Additionally they can expect to learn more about their business, their market, etc. You want to know that in and out because you will understand the assumptions driving your financial model and this forms the basis for the valuation. We would recommend that sellers perform a SWOT analysis-Strength, Weakness, Opportunities, Threats. A SWOT analysis guides you to identify the positives and negatives inside your Ambulatory Surgery Center business (that is the S and W) and outside of it, the external environment (that is the O and T).

This will not only help the sellers understand what they need but also communicate what they expect from a buyer and the sale process.

Additionally, you need to expect to put a team around you to help ensure you meet your goals. Physician owners of ambulatory centers are very intelligent and accomplished professionals, but in general will likely only complete one or two sales transactions in the course of a lifetime. Yet those deals will probably be the largest and most significant financial surgery center sales transactions of their career. So by definition, the inexperience of these essentially novice surgery center sellers can prove financially catastrophic as they negotiate with a surgery center buyers’ full-time, professional M&A team. Additionally there are many implications such as legal and tax that you will encounter not to mention the negotiation strategies and business implications. Having the right advisors upfront can help you structure the transaction whereas to mitigate or lessen them

You should have a team that consists of the following:

  • Transaction accountant
  • Business accountant
  • Transaction lawyer
  • Industry specific investment banker
  • Key member(s) of your management team

A transaction committee that is empowered by the group of owners and a Valuation professional  and lastly expect the unexpected and not allow it to create deal fatigue. Humans are emotional creatures and our emotions sometimes get the best of us and understanding the stressors going in will help you manage your expectations.

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The circumstances and needs of the owner lead to the selection of an appropriate marketing process for the business. The three marketing processes are negotiated sale, targeted auction and broad auction approach. A negotiated selling process is warranted when only one prospect is identified and the entire process is focused on that prospect. A targeted auction process is used when a handful of prospects are identified and speed and confidentiality is a big concern. A broad auction process is used when you want to cover all of the markets and maximize your sales price and terms. The seller should match their needs with one of these marketing processes. Hybrid approaches can be used and very often are. For instance, a negotiated transfer process may involve several buyers simultaneously at different points in the process. There may be a handful of buyers interested in purchasing the company, some of whom are making offers while a few may be meeting the owner for the first time. A targeted auction may be used for as few as two prospective buyers, but ideally involves more. In this case, the process is orchestrated to convince the buyers that an auction is underway.

Targeted and broad auctions each have one and two-step variations. A one-step auction is like herding cats with prospective buyers playing the part of the running felines. The investment banker attempts to maintain control and keep the procession as orderly as possible. With a fair amount of skill and some luck, a buyer might be corralled into paying a fair price. A two step auction is more formal than the one-step auction and much more managed. The two steps are stages with some soft deadlines.

In general terms, we are not fans of the negotiated sale approach because in its purest form, it removes the biggest leverage that you as an owner have and that is competition. Buyers know this and that is why they want to proactively pursue you and have you execute a no shop clause. There are exceptions to this, but not many. For example if you have a one OR surgery center that is essentially an extension of your office and you are retiring and want to sell it to your partner, that might be a situation where the negotiated process is acceptable. If you are selling to an unaffiliated doctor or group of doctors you need some competition.

The dictionary defines an auction as “the public sale at which goods or property are sold to the highest bidder.” The auction process concept had been modified in an attempt to sell privately owned surgery centers. The process attempts to entice a limited number of buyers in a quiet auction setting. Unlike a public sale auction, where the bidders see each other and strategize based on this awareness, the private auction creates a bidding environment. A savvy intermediary or seller for that matter orchestrates this process to the benefit of the seller, both in terms of confidentiality and a maximized selling price. We get asked a lot about terms because we stress the selling price more often that the terms and synergies or culture fit if you will with the buyer. Terms and synergies are very important. The better the price, the more room we have to deal with terms and it has been our experience that when a strategic buyer sees a great fit they will be one of the higher offers and be more flexible with their terms.

We typically shy away from using the word auction when we speak with buyers, nor do we want to advertise that an “auction process” is being employed for obvious reasons: buyers dislike being part of this process and sometimes the buyers that are the best fit will not partake. The buyers do understand that we are actively negotiating with multiple buyers. The justification to the seller is that the process will in reality make the deal easier to close. We have seen it over and over, when a seller is negotiating with one buyer, a great deal of the time the deal falls apart late in the process because of the seller’s perceptions. This process ensures that the seller understands the current market and the market value of the surgery center.

Targeted auction means targeting a short list of potential buyers and working to get offers from about 3 of them and negotiated those offers. The targeted auction focuses on a few clearly defined buyers that have been identified as having a strong strategic fit and or desire as well as the financial capacity to purchase your surgery center. There is a risk of leaving money on the table by excluding a potential bidder that may be willing to pay a higher price. The targeted auction is better than the negotiated marketing approach in most situations; the challenge is choosing who goes on that short list. I have seen it advised many times over that you should go to three buyers and get offers. You are not selling a commodity, you are selling a very unique business that you have spent a lifetime building. The limitation to this approach is that you are rolling the dice, hoping that you will somehow end up with the best three potential buyers, when it is just as probable that you could end up with the three that will offer the least. At an ASC business conference we attended, the CEO of one of the strategic buyers that market themselves as turnaround specialists asked how we knew which buyers were the most active. He has found it tough because the hot ASC buyers from the year before are not very likely to be the hot surgery center buyers the next. That is one of the challenges. Since we have established that you are in search of the most qualified and MOTIVATED buyers, the broad auction approach is what we recommend for most situations and this is the answer to that CEO’s question.

A broad auction maximizes the universe of prospective surgery center buyers approached. This may involve contacting dozens of potential bidders, comprising of the strategic buyers and financial buyers. By casting as wide of a net as possible, a broad auction is designed to maximize the likelihood of finding the buyers that will offer the best prices, terms and culture fit.

While this approach typically requires the most work during most parts of the process; such as organization, preparing the list of target markets and targets within those markets, marketing process points and resources compared to the negotiated sell with a single buyer; it also is the only approach that will ensure that you obtain the peak price and terms. Even if you want to sell your surgery center to the local hospital, we cannot stress enough that the broad auction approach is the process that you want to use. In short, you want to find the buyers that are under the compulsion to buy and negotiate those offers as high as you can and then those offers become the fair market value (FMV) that the hospitals are looking for. Because if you engage the default method of FMV of engaging a FMV professional, the result will be a hypothetical value!

IF you want to read more about this you can review our website, our article about Market Value or our webinar.

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Marketing materials often represent the first formal introduction of your ambulatory surgery center to the potential buyer/investor. They are essential for peeking the investors’ interest and creating a positive first impression. Effective marketing materials present the target’s investment highlights in a succinct manner while also providing back-up evidence and basic operational, financial and other essential business information. The two main documents for the early stage of the process are the teaser and the confidential seller memorandum.

Teaser

The teaser is the first marketing document presented to prospective buyers. It is designed to inform buyers and generate sufficient interest for them to want to know more. The goal is to garner interest not to screen out. You will have a phone conversation with the potential buyers that have sufficient interest. That conversation will help determine if they are a serious buyer or not.

The teaser is generally a short one or two page synopsis of the surgery center, including the overview, highlights and summary financial information. You want to include the most important information that a buyer wants to know about first such as:

  • How many physicians are partners and how many perform cases at the center
  • The case mix
  • In-network or out of network and the percentage of each
  • The size of the center (sq ft and ORs, procedure rooms, etc.)
  • Case volume
  • Percentage of the overall cases are perform by each physician
  • Years in the business
  • Revenue and EBITDA
  • The year over year growth
  • In a CON state or not
  • Location (we would only put the general area of the country)
  • A few compelling lines about the future growth of the center and local market

Make sure that this is a positive presentation of the ASC. Do not put in screening statements or screening questions. I received an email a few years ago from a physician owner of an ASC-the email I assume was his version of a teaser. The tone of the email was combative with a lot of screening statements that did not leave a very positive first impression. I actually visited the center almost two years after I received that email. The center is amazing, it is very profitable at about 20% capacity, the capabilities are limitless, the rooms are huge, there are plenty of ORs and procedures rooms, the CON is very liberal for an ASC because it belonged to a hospital at one time but the center is stuck in neutral. The challenge is the disconnect in the process and not working to find common ground. The physician’s demands were presented as if in stone with no flexibility. Based off the response or lack thereof, the introduction was not successful and it tainted the water. So the takeaway is that the process is important as is first impressions.

Selling memorandum

The seller memorandum is a detailed written description of your surgery center that serves as the primary marketing document for the surgery center. It takes significant time and resources and the collaboration of many people to draft this document. It typically contains an executive summary, investment consideration and detailed information about your surgery center as well as market information, operations, facilities, management, employees and surgeons.

The memorandum contains a detailed financial section presenting historical and projected financial information with an accompanying narrative explaining both past and expected future performance. This process is carried out by the deal team and the CFO and/or finance team. This process involves normalizing the historical financials and future financials-you develop a set of projections, typically 5 years in length, as well as supporting assumptions and narrative. The projections must be realistic and defensible in the face of a potential buyer’s skepticism.  This basically tells the story of your surgery center and the deal. Your financial statements are recast for discretionary and onetime expenses. You include whatever information is necessary to enable a buyer to make an informed decision to move forward without giving too much sensitive data away. Include a benefits stream that may compromise earnings, cash flow and distributions on a pro forma basis.

Confidentiality agreement

A confidentiality agreement, also known as a Non Disclosure Agreement, is a legally binding contract between the surgery center and each prospective buyer that governs the sharing of confidential company information.

The confidentiality agreement designates the time period during which the confidentiality restrictions remain in effect.

It outlines under what limited circumstances the buyer is permitted to disclosure the confidential information provided and also prohibits disclosure that the two parties are in negotiations.

Mandates the return or destruction of all provided documents once the prospective buyer exist the process.

Prevents prospective buyers from soliciting to hire or hiring the surgery center employees for a designated time period.

Prevents prospective buyers from collaborating with each other or with outside financial sponsor without the prior consent of the target-this is to preserve the competitive environment.

Management presentation

The management presentation is typically structured as handouts in this market. Typically, if an investment banker is engaged he will take the lead on preparing these materials with substantial input from the surgery center. This is for when the potential buyers come on site to visit the surgery center and the leadership. There is significant rehearsal time that is intense and time consuming. The presentation format for the most part maps to the seller memorandum, but is more concise. It contains additional level of detail, analysis and insight into the growth potential of the surgery center (because this is what the buyers are buying-future growth).

Data Room

The data room serves as the hub for the buyer due diligence. It is a location typically nowadays online where comprehensive detailed information about the surgery center is stored, cataloged and made available to pre-screened buyers. It contains the stage one and stage two due diligences. You can create folders within you data room that allows you to release information in folder or in chunks if you will. You control the flow of information as far as who sees what and when they see it. A well-organized data room facilitates buyer due diligence, helps keep the transaction process on schedule and inspires confidence in buyers. The data room tracks the activities such as when someone views a document, downloads, etc. Additionally you can control the access, ability to download, upload, view, etc.

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Researching the surgery center investor markets for most buyer universes is not complex. This process is one of the easy steps. For the hospital health systems look towards the hospitals in your immediate market and then the outlying markets for systems that might have an interest in putting a flag in the ground in your market. In each of the markets, when in doubt put them on the list of potentials.

For the ASC management companies you can look at the ASC association directory, Becker’s Review list of management companies, attend ASC conferences as well as call the other ASCs in the state to see who their management companies are. Additionally Google is a great tool for locating the local and regional management companies. So is LinkedIn.

For physicians you can look to the state provider databases, the hospital and other ASC provider directories and LinkedIn, we use LinkedIn a good bit to reach out to physicians, management companies, hospital executives and financial buyers.

The toughest market for owners will be the financial markets. This market is very large and if you have no experience with this market the tough part is figuring out who would be open to buying ASCs. There are databases that are professionally prepared that have contact information and investment criteria that you can read. You can send out your teaser to the contacts listed.

Additionally if you are thinking payers are within your universe, just look at the list of the insurance providers in the area. The regional providers are typically the most interested compared to the national payers but things are changing.

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This goes back to the market and what you want, what market your surgery center fits into.

If you center has an EBITDA of $600K and not really high level executive team, then there is zero reason to go to the financial markets. Thus you would look at the hospital health systems that are in your market area or want to be in your market area. How would you know if they want to be in the market area? Call them. When in doubt, pick up the phone and present the teaser. It is a lot of work, but at this stage of the process you MUST create competition. For example, one center had been in conversation with a hospital literally 5 miles from it for a few years. This hospital had not been very helpful in the development of the center by pressuring the docs to not refer there. A few times they made offers and over time those offers were reduced and timelines not met, etc. The physician owner finally engaged us and we created competition for the center through solicitation offers from health systems not in the local market, but with hospitals in the region. We were able to negotiate an increase in sales price of 40% and much more favorable terms with the hospital 5 miles away because they did not want the competition putting a flag down in their backyard. This was a situation where we allowed the rumors to fly because it helped drive up the price and allow us to have very favorable terms. It all started with the teaser being emailed, then a follow-up call presenting the teaser.

ASC Management companies are fairly easy to locate. There are about 60 national and regional management companies. They all have websites that have information about them and their investment box.

Recalling what we said about defining the market for you surgery center or your buyer universe if you center scores high as far as the most attractive characteristics and have an EBITDA of a million or more then the majority buyer would be in your universe. When in doubt send your teaser out, typically to the CEOs or development executives. Also have your surgery center development companies agreement drawn up and looked at.

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The first step in marketing you surgery center begins with contacting prospective buyers. This typically takes the form of a scripted phone call to each prospective buyer by a senior member of your group or the investment banker, followed by the delivery of the teaser and Confidentiality agreement via email, mail or some other method. We also will sometimes use email first; make contacts through LinkedIn, not posting in the groups but direct one to one contact and mail depending on the target market.

After the prospective buyer shows interest, we will discuss their desires with them and their ability to actually do the deal. This includes where their funds are coming from, who on their side would be involved with evaluating the transaction, what their typical steps are, timelines, etc. We want to get a feel and set the tone for the process.

After both parties feel comfortable and have executed confidentiality agreements, you will present the prospective investor the seller memorandum. You typically give them several weeks to review, study the information, have internal discussion,s etc.  During this time we will maintain a dialogue with the investors, often providing additional color, guidance and materials as appropriate on a case by case basis. We will open the data room for most of the investors at this time. This will further solidify the interest and trust. After that time we will verify the investor’s continued interest and we could set up a conference call and then an onsite visit. Depending on the number of interested parties, we could start the LOI process and negotiate that. Again depending on the number of buyers that are a solid fit we could start the site visits then go to the LOI, it is a process-based decision made at that point and time.

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So you want to know when and how do you present the information to the potential surgery center buyers and ASC investors? You present the information in sections, or chunks if you will. Look at the process as a weaving the sell/buy process. While you are selling your center, you also are buying a partner if you will, thus it is a delicate balance of selling and screening. After you present the teaser and have a conversation or conversations with the potential buyer until you feel comfortable enough with each other. Then you will send the seller memo and later open the data room.

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So how do you manage the process? No surgery center buyer offers to pay a higher price without being incentivized, even if it can afford to. It is the seller’s responsibility to employ a transfer process that leverages its strengths so that an ASC buyer will pay the maximum price and fair terms. Having said that, you want to release information as close to your timeline as possible in order to manage the process and your timeline and CREATE THE COMPETITION that will allow you to obtain the peak price and terms. We want the buyers to be in the same stage of the process as the others so we can leverage them against each other and be more confident in our negotiating position.

We typically, if the surgery center warrants this, go to the private equity group markets and to ASC Management Companies, then to hospitals. The reason is that in our experience that is the order of the highest priced offers and we want to have offers in hand if at all possible before hospitals health systems go to obtain a FMV.

We set the tone and outline what we want to see in a LOI during discussions with the ASC investor/buyers. We do not allow no-shop clauses unless they are accompanied with break-up fees. In other words, we will continue to market the surgery center and negotiate with potential buyers unless you put up money that if you do fail to close you lose it. Most of the buyers will attempt to have the no shop clause in the LOI but back off of it when we convey the break-up fee or they will pay the breakup fee. We have gotten break up fees into LOIs with all types of buyers.

You might even receive what a buyer will convey as a preemptive offer, which is an offer that has the intent and it is an attempt to lock out the other bidders with a high purchase offer.  Simply put they want to prevent you from marketing the surgery center, locking the center up with their offer while they conduct their due diligence. In these cases you need to look for the loopholes in their LOI and point those out, but most are not really preemptive offers, they just want you be buy into that and agree to the no shop clause.

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How do I find out what someone is willing to pay for my center? We recommend a two stage offer solicitation process. We will proactively market your center to multiple buyers and multiple buyer types, then leverage competitive bids. This process helps answer the question of what buyers will be willing to pay for your center.

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There will be organizations that contact you directly to gauge your interest in selling your center. They could utilize any form of negotiation tactics to leverage the best price for THEM. They may even state that your center is of strategic interest to them and that their offer is based off of their strategic needs. While this could be true, the only way you can be confident that you are getting the best offers is to create competition for your center.

Researching the investor markets for the surgery center buyer universes is not complex. This process is one of the easy steps. For hospital health systems, look towards the hospitals in your immediate market and then the outlying markets for systems that might have an interest in putting a flag in the ground in your ASC’s market. In each of the markets when in doubt, put them on the list of potentials buyers.

For ASC management companies you can look at the ASC association directory, Becker’s Review list of management companies, attend ASC conferences as well as call other ASCs in the state to see who their ASC management companies are. Additionally Google is a great tool for locating local and regional management companies. So is LinkedIn.

For physicians you can look to state provider databases, the hospital, other ASC provider directories and LinkedIn. We often use LinkedIn to reach out to physicians, management companies, hospital executives and financial buyers.

The toughest market for owners is the financial markets. This market is very large and if you have no experience with this market, the tough part is figuring out who would be open to buying ASCs. There are databases that are professionally prepared that have contact information and investment criteria that you can read. You can send out your teaser to the contacts listed.

Additionally if you are thinking payers are within your universe, just look at the list of the insurance providers in the area. Regional providers are typically more interested than national payers, but things are changing.

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Syndicating My Surgery Center (6)

So What is the difference between ASC syndication and surgeon recruitment and outpatient surgery centers? Physician recruitment is the process by which we recruit physicians and surgeons that will do procedures in our outpatient surgery centers. When we refer to physician recruitment we are not recruiting that physician to invest in the surgery center -at least not until we have established a substantial relationship with them-we want them to use the surgical center for their cases.

Syndication simply refers to a private securities offering of ownership interest in a healthcare company. You run across this term most often in the selling ownership interest in the surgery center business, but you can syndicate just about any kind of healthcare company: surgery center, medical office building, medical equipment company, and so on. Syndication typically takes the form of a sale of limited liability company units or limited partnership interest, although they can also involve the sale of shares in a corporation.

Recruiting surgeons in terms of a surgery center is always part of the surgical center syndication process, but syndication is not always part of physician recruitment.

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The preparation all depends on what stage of the life cycle that the surgery center is in, but a good bit of the process is the same. Let’s start the discussion from the pure recruiting physician’s angle around an existing and operational center cycle.

In the physician recruitment area, one of the first steps is to evaluate the ambulatory surgical center to see if and why any of the current physicians are not bringing all of their qualified cases to the ASC and then what the barriers are to them bringing their cases. Meet with each of the physicians and ask the question: “What can we do differently that will make you more comfortable in bringing all your appropriate cases to the outpatient surgical center?” One of the first steps is to understand where the shortfalls are occurring. The reason that this step is very important is because going forward, ASC operational inefficiencies will strongly affect recruitment and retention of cases and recruiting new doctors to your ambulatory surgery center.

How do you prepare to recruit new physicians to your syndication? Some of the typical responses

  • Preferences with equipment or instruments not available at the ASC
  • Investments in another surgery center or a procedure suite at their office
  • Hospital politics/pressures
  • Confusion around out-of-network vs. in-network contracting at the ASC
  • Confusion with the surgery center facility cost for cash pay patients
  • Staff or scheduler non-compliance
  • Lack of adherence to start times
  • Lack of familiarity/comfort with ASC staff
  • Lack of transparency – both financially and with executive decisions
  • Third party payer contracts
  • Lack of background research on /compatibility with providers
  • Lack of partner enthusiasm / partner frustration

It is imperative that leadership understands that their top priority is to remove as many barriers as possible so that it is easy for the surgeons/physician to perform all of their qualified cases in this center.

Create pro formas that can quantify the financial benefits adding only a few more cases per month. ASC surgeon-owners must clearly see how incremental case volume growth leads directly to higher margins (given that overhead costs are largely fixed when centers are at breakeven). This helps make the case that the investment of their time in the recruitment process is very profitable.

Evaluate each surgeon’s block times – some surgeons may be able to or open to being flexible with their scheduling in order to accommodate new physicians.

Define the kind of physician you want and can support ,or how you would support physicians that are not married to another ASC. For example, a natural fit for a spine surgery center center is to add pain or other orthopaedic and podiatry. While we at one time could pick and choose what types of specialty docs we wanted to add, this is not the case in all markets. What if you have the physical space that could handle GI, but no GI equipment and you are not making a significant profit to be able to purchase GI equipment. Could you recruit say 3 busy GI physicians  and package them together so they purchase the equipment and then lease it back to the center, essentially creating an endoscopy center? You can justify this since the center is not highly profitable. In other words, you need to be creative through this process.

Determine your recruitment process and who will be responsible for driving it. Putting together a plan will help rally the team and get others bought in. You then will discuss this process with existing partners, physician users and staff. Everyone needs to be on the same page and understand what’s being done, the importance of the process and the value of the process. In other words, get the buy-in and commitment from as many of the current players as possible. We even put together a check list of activities that the team members check off and commit to help with.

Gather current case load statistics such as utilization reports, volume projections and actual cases and current schedules. Get familiar with other metrics like turnover time that you think makes you stick out in a positive way. Collect the equipment list that will allow you to know what cases you can support now.

Create physician recruitment material, such as a one-page fact sheet and a brochure that has pictures of the center, a map of where the center is compared to the hospitals and other landmarks, list of the state of the art equipment, awards, turnover time, and block time available. Use it to tell your unique story and enticing message. Are you 100% physician owned, do you have physical space expansion abilities, what sets you apart from any other center around you? Point of caution: do not have anything in those materials about investing in the surgery center or that there is possibly an opportunity to invest or anything along that line because this is covered under the securities laws which prohibit general solicitation when syndicating a surgery center.

Build a target list of physicians in the area that could do procedures in your ASC. Think broadly here. You can compile a list from many difference sources: the National Provider database, state provider database, research the staff at area hospitals, gather the physicians’ directories, etc.

On the syndication side, if this is a primary offering you will need to get the offering documents that are prepared. A primary offering is when the surgery center sells an equity position and receives the payment for the equity position.

If this is secondary offering, when a current share holder sells their units and gets the money, you want to collect copies of the original offering documents, current financials, any contracts, debt, etc. We give copies of all of the original documents that the current owner was given with updated financial and case load information, as well as an updated disclosure document, etc. to the new physicians prior to them investing. We need to make sure they have all the information disclosed. When in doubt disclose it in writing. When you sell securities you need to understand that you must disclose, disclose, disclose.

Decide how much you are going to sell and where the shares will come from.

Review your governing documents. You need to understand what the document state. You might need to update them for various reasons, and this is a good time to do it. For example, if you are one of the founding members of an existing ASC or the rain maker, you may want to consider carving out your ownership from some restrictions that you would apply to new owners. You can create different classes of shares such as the founding owner’s class shares. Depending on the circumstances, a carve-out from certain restrictions may be appropriate since you took the risk on the initial investment and developing the ASC. Additionally one of the surgery centers that we worked with historically had not had a non-compete. The market was fairly saturated and a non compete would add another road block to the recruitment efforts. What we did instead was to strengthen the 1/3 rule language, where we include quarterly audits and a claw back provision if a surgeon was not meeting the 1/3 safe harbor.

Anticipate a new physician’s desires and know what you are willing to be flexible on. In most markets there are now a limited number of physicians that can be recruited. Your openness to accommodate will help you in the recruitment efforts. The act of accommodating a physician often requires significantly less effort than the benefits it rewards you.

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Ambulatory surgery centers sometimes look at physician recruitment as a one-time “event,” carried out at some stage in the development, which can later be forgotten about during the center’s day-to-day operation. The most successful surgery centers understand and make surgeon recruitment an ongoing process. For some centers, this will be a paradigm shift and one that they will need to make. The market is changing, and centers that do not adapt will not survive.

If you are not at 100% utilization and your goal is to grow the center, you should always be recruiting. Each dollar of revenue once you are at breakeven point can add up to between $.65 and $.80 of profit to the bottom line.  Successful recruitment campaigns are as, if not more, important to the success of your ASC than strong payor contracts and business best practices. The most successful surgery centers have owners that have adopted a physician recruitment mindset. A large part of your administrator’s job needs to be on going physician recruitment. At least 20% of their time needs to be in the field meeting and recruiting new physicians. Physician partners should be recruiting as well. There should not be anything going on as far as what doc is doing their cases where in the market that the administrator does not know about. Nothing! That takes a commitment and lots of work.

Remember that each additional dollar of revenue can add up to between $.65 and $0.80 of profit to the bottom line once an ASC achieves breakeven financial status. Each partner needs to keep that in mind when considering how physician recruitment results in increased patient volume and profitability … their ultimate conclusion will be that case load recruiting is a highly profitable investment of their time.

Syndication can primarily take on one of two forms: (1) syndication of a “de novo” or start-up ASC; or (2) selling interests in an existing ASC to physician utilizers or potential utilizers.

The sale of ownership interests to physicians who bring cases to the ASC is an important factor in determining an ASC’s success. Selling equity interests in the ASC to physicians who regularly use the facility strengthens their relationship to the surgery center. Also, physician ownership is often a prerequisite to consummating a sale of the surgery center.

Leading up to a sale of the surgery center is another optimal time to syndicate. Adding 100 cases a month of pain to your orthopaedic ASC could help you receive double digit multiple of trailing EBITDA as we have pointed out in the past.

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Recruiting new physician users to a surgery center, especially in this mature market is a stressful and strategic process. Approach recruitment and retention as one and the same. You need to be recruiting your current doc in order to retain them because if you are not, someone else is. Additionally, when you are recruiting new doctors you need to approach it with retention in mind. In other words, you need to make sure that everyone understands that this is a partnership and that you will be hopefully be working together for a long time to come. Thus work hard to ensure that everyone is treated as special.

We have a two avenue approach to this process. 1) We work with existing partners and physicians that utilize the center to develop an ongoing target list, gleaned from their knowledge of available physicians (or knowledge of physicians that will know who should be on our radar, such as anesthesiologists, they seem to be in the know and are great resources), and 2) We will create a mass list of all the potential physicians and surgeons that are seeing patients in the center’s market area. We will market all identified physicians through the avenues discussed above.

One of the greatest assets in recruiting new physicians is the mindset and commitment of the current physician base. This support can take form in a variety of ways, including speaking with new recruits, giving tours, attending new recruit open houses, going on physician visits, attending recruitment dinners, making phones calls, and/or agreeing to be part of a letter-writing campaign.  The role of current individual owners will depend on their personalities and comfort level, but nonetheless all owners should accept – as part of their ownership mindset – the responsibility to be part of the recruitment process. The role can range from sharing names of potential new recruits to being the champion recruiter.

An agenda item at almost every board meeting should be: recruit surgeons to surgery center. During discussion of this item, physicians should identify which physicians the ASC should be reaching out to. Ask physician-owners to come prepared to put forth a few names of physicians and a little background — if known — so that the designee responsible for recruitment can pursue that physician in coordination with the physician partners. Part of the ASC’s plan should be to have a continually updated target list of physicians in the community that should be contacted and a list of physicians coming into the community for future consideration.

All owners and staff should be walking billboards for the center to their practice partners and other colleagues, as well as keeping an eye out for surgeons who could become future owners or who could bring cases to the center now. It’s very important that the owners have a compelling “elevator pitch” that briefly highlights the center’s unique benefits and conveys its message. Everyone will be able to use this speech at medical meetings, continuing education courses, or even in the lunch line at the hospital.

Physician-partners should introduce themselves to physicians that are new to the area on a regular basis. The partners should tell these prospective investors and partners about the surgery center, noting that there could be an opportunity for them to utilize and invest in the ASC. They can encourage the new-to-the-area physician to talk with current physician-owners of the center. Physicians can quickly create an open door to recruits just by picking up the phone and introducing themselves.

Don’t just focus on high-dollar surgeons or the busiest surgeons; a physician who does 15 pain cases a month could eventually get to 60 cases a month and these providers are often easier to work with. 

The local administration staff at the center should also watch newspapers and local magazines ads for announcements of new physicians coming to the area.
Surgery centers proactive in their recruitment efforts often provide their physicians with printed information — such as brochures — about their ASC to help with the elevator speech mentioned earlier. Some provide recruitment cards, which are similar to business cards but have the highlights of the ASC printed on the back of the card. These are small and easy for doctors to carry around.

ASCs can also consider using a consistent, direct mail campaign to prospective physicians that alternate between letters from the partners, to brochures, to postcards, all with the end-goal of keeping the surgery center on the minds of the physicians that you are recruiting. This is what we call the vitamin approach or drip marketing. This process sometimes has immediate results but it is designed to improve the other activities over time.

While some of the best leads and referrals come from the current surgeon owners, the most successful surgery centers also tap into other sources such as anesthesia providers, traveling pharmacists and equipment and implant vendor representatives who are in position to provide leads. They can be your eyes and ears. Most people are willing to help — you just need to ask, and ask often. Be persistent.

The healthcare economy demands that we all look at our business differently and, where practical, find better ways to increase surgical volume.  Create a direct-to-patient marketing program. If you have patients that you can refer to the physicians they will be more receptive to doing procedures in your center. This is the next wave in the ambulatory surgery center development.  This can involve making and regularly updating a website, conducting search engine optimization, posting ads in the local newspaper and magazines, billboards, speaking with the larger employers etc. to build patient traffic.

The success of the outpatient surgery centers requires a total “all hands on deck” approach, Complacency and the wrong mindset is a major contributor of the under performance of the surgery center, and the center’s top priority is to ensure that the partners and providers are always engaged.

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Note that we aren’t lawyers, thus you need to work with your lawyer on this. This is from the perspective of an SEC registered and FINRA Licensed Investment Banker as well as a Securities Principle responsible for the supervision of Investment Bankers and their activities.

You need to be aware that syndication involves the sale of securities-whether you are selling shares, or LLC Units or limited partnership units. Federal and state securities laws determine the manner in which the offering and sale of ownership interest must be conducted. Additionally securities laws control who can affect the sale of securities and how. There is a white paper and a few articles around this very important but not well understood law that are posted on the Ambulatory Alliances website.

To ensure compliance with the securities laws, syndication almost always involve some form of disclosure documents, whether an offering memorandum, purchase agreement or similar instrument. The primary purpose of such a document is to fulfill the disclosure requirements of the Securities Act, while serving as a shield against any future charges of violating the antifraud provision of the securities laws. The documents will serve as an outline of the transaction and a tool for marketing the offering. The gist of the documents is to ensure you have an educated buyer, educated in the sense that they know what they are getting into.

With secondary offerings, even though one physician is selling some of their shares to another physician you need to make sure that the second physician is fully informed by giving them copies of all of the original documents and updated documents such as current ownership percentages, updated financials including any debt instruments, updated disclosure documents etc.

Additionally, we have seen some doctors trade these securities often. The securities laws as well as all of the transaction documents mimic the laws and state something along the lines of- you acknowledge that the purchase of the securities is for the investment intent and not for resale. The securities must come to rest in the hands of the investor. Different states have different interpretations or safe harbors so to speak as to how long a physician must own the security before they can resell it. That is why when we do a resyndication, before executing an exit strategy we make sure the securities have come to rest and we are very careful.

In some cases around the above we have advised clients in certain situations that warrant it that they can write the state securities administrators and ask for a “no action letter”, which is a letter to the state securities administrator or SEC for that matter explaining the action asking if the staff would not recommend that the Commissioner or Administrator take enforcement action against the requester based on the facts and representations described in the individual’s or entity’s original letter. ASCs have been granted these in the past.

A common question is what kind of pre-offering communication can be had with physicians.  The Securities Act most of the time prohibits issuers from engaging in any form of general advertising or general solicitation in connection with the offer or sales of securities in an exempt private offering. Similarly, almost all states mimic this. It is not entirely clear what constitutes general solicitation or advertisement in a private offering but an effective tool for conducting syndication without running afoul of the prohibitions against general advertising or general solicitation is to be able to document the existence of a substantial and pre-existing relationship between the entity and the prospective physician investor. In addition, measures such as tracking offerees, pre-qualification questionnaires and other qualification techniques should be employed.

But what about recruiting physicians that you do not have a pre-existing relationship with? Well you are not supposed to send them a letter or brochure, etc. that outlines or advertises the investment without running afoul of the rules. What we have done is to direct mail that outlines the facts of the center and why a physician might be attracted to a center around the physician recruitment part of the process. We do not offer, we do not refer to nor do we discuss any investment until after we have established a pre-existing relationship with them. We do not even have the investment documents prepared if it is a primary offering because we are merely gathering indications of interest, which are general in nature.

We also recommend that a physician try the center out before they are offered an investment opportunity in the center assuming the center is operational. The entire process would take about 6 months or longer thus you should be able to document the relationship that we have been discussing by the time you approach them about an investment.

Because the interest represents ownership under the federal anti-kickback statute, the ownership percentage being sold cannot be tied to the past or anticipated volume of a physician’s procedures. Additionally, the purchase price must be consistent with fair market value.

Make sure that investments are offered on equal terms to all physicians buying at any given time.

Neither the ASC nor its owners nor any affiliate may loan monies to a physician for the purpose of acquiring an equity interest in the ASC.

Investor must fully disclose his or her or its investment interest to patients treated at the facility

All of the transactions that I have dealt with have required that the investor be an accredited investor and for this situation defined as:

  • a director, executive officer, or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors; (think if the physicians sets up a LLC to invest in the ASC, the physicians must be an accredited investor)
  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase excluding the value of the primary residence of such person; – a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;

There are some options here, if you have a physician where their income or net worth does not qualify them as an accredited investor you can make them a director (board of directors) or executive of the surgery center (e.g. medical director) and they qualify.  You can also request a no action letter.

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The preparation all depends on what stage of the life cycle that the surgery center is in and if it is a primary or secondary offering, but a good bit of the process is the same, so here is what you need to do to syndicate to new physicians.

You need to be aware that syndication involves the sale of securities-whether you are selling shares, or LLC Units or limited partnership units. Federal and state securities laws determine the manner in which the offering and sale of ownership interest must be conducted. Additionally securities laws control who can affect the sale of securities and how.

To ensure compliance with the securities laws, syndication almost always involve some form of disclosure documents, whether an offering memorandum, purchase agreement or similar instrument. The primary purpose of such a document is to fulfill the disclosure requirements of the Securities Act, while serving as a shield against any future charges of violating the anti-fraud provision of the securities laws. The documents will serve as an outline of the transaction and a tool for marketing the offering. The gist of the documents is to ensure you have an educated buyer, educated in the sense that they know what they are getting into. If this is a primary offering you will need to get the offering documents prepared. A primary offering is when the surgery center sells an equity position and receives the payment for the equity position.

If this is secondary offering-a secondary offering is when a current share holder sells their units and gets the money, you want to collect copies of the original offering documents, current financials, any contracts, debt etc. Because we give copies of all of the original documents that the current owner was given with update financial, case load, etc to the new physicians prior to them investing. We need to make sure they have all the information disclosed. When in doubt disclose it in writing.

Review your governing documents. You need to understand what the document state. You might need to update them for various reason and this is a good time to do it. For example if you are one of the founding members of an existing ASC or the rain maker you may want to consider carving out your ownership from some restrictions that you would apply to new owners. You can create different classes of shares such as the founding owner’s class shares. Depending on the circumstances, a carve-out from certain restrictions may be appropriate since you took the risk on the initial investment and developing the ASC. Additionally one of the surgery centers that I am working with historically has not had a non-compete. The market is fairly saturated and a non compete would add another road block to the recruitment efforts. What we did instead was to strengthen the 1/3 rule language where we include quarterly audits and a claw back provision if you are not meeting the 1/3 safe harbor.

Anticipate a new physician’s desires and know what you are willing to be flexible on. In some markets there are a limited number of physicians that can be recruited, well most markets now. Your openness to accommodate will help you in the recruitment efforts. The act of accommodating a physician often requires significantly less effort than the benefits it rewards you with secondary offerings even though one physician is selling some of their shares to another physician you need to make sure that the second physician is fully informed by giving them copies of all of the original documents and updated documents such as current ownership percentages, updated financials including any debt instruments, etc.

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Terminology (11)

EBITDA refers to earnings before interest, taxes, depreciation and amortization. It is considered a good way to evaluate profitability and is often used to assess the performance of a company.

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Gordon Growth Model is an equation used to calculate the value of stock based on a future series of dividends that grow at a constant rate. It tends to be applied to mature companies with low to moderate growth.

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Discounted cash flow (DCF) is a form of analysis used to valuate ambulatory centers using the time value of money. What this means is that it accounts for the fact that a set amount of money has different buying power in the future than it does in the present. It uses a mathematical formula to account for this difference when determining the value of a particular company.

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Trailing twelve months (TTM) measures a company’s financial health. It covers the company’s earnings over the 12 months immediately prior to the report. This ensures that the data isn’t affected by seasonal trends.

It’s one way to valuate a center, using TTM EBITDA (earnings before interest, taxes, depreciation and amortization).

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A certificate of need (CON) is a legal document that is required in a number of states before proposed acquisitions, expansions, or facility creation. A federal or state regulatory agency must approve the need within the community for new health care facilities. This limits competition and makes existing centers more desirable.

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Leveraged buyout (LBO) analysis is performed when one company considers buying out another using high levels of debt. It is similar to DCF, but rather than look for present value, the potential buyer is looking to earnings based on the initial investment. This is often done when the goal is to buy a company, fix it up, and then sell it at a profit.

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The Letter of Intent (LOI) is a legal document that outlines the agreement between two or more parties before an agreement is finalized. LOIs are not entirely binding, though they may contain provisions that are binding such as a non-disclosure agreement or “no-shop” provision.

LOIs are used to:

  • clarify key points of a transaction for all parties involved
  • officially declare the parties are negotiating
  • provide safeguards in case the deal collapses
  • verify issues of payment for someone else (e.g. credit card payments)

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Ambulatory centers involve patients who are both in and out of network. Out-of-network (OON) patients are those whose insurance plans do not have a payment agreement with a particular center. The percentage of out-of-network patients at an ambulatory center influences potential buyers’ perceptions of the center.

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A group purchasing organization (GPO) refers to a group of businesses who combine their purchasing power in order to get better rates on medical and other supplies. Management companies often operate as a GPO because their involvement with multiple ambulatory centers allows them to negotiate with suppliers and receive better rates. This is useful because lower rates help increase profits.

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Stark regulations refers to the different phases of the Stark Law, which prohibits physician referrals to a center in which he or she has a financial interest. While it has several exceptions, this may impact the manner in which a physician owner of an ambulatory center can increase business.

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Safe harbor regulations are provisions that permit certain conduct within a general standard. For example, in surgery centers, physicians might agree to a 1/3 safe harbor, using the center for at least one third of the cases they have that could be performed at that center.

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Valuating My ASC (12)

An ASC’s purchase price is typically based on the ASC’s earnings before deducting interest, taxes, depreciation and amortization (EBITDA). This gross earnings number is then multiplied by a fair market value multiple, minus the ASC’s long-term debt, then multiplied once more by the percentage to be acquired by the physician buyer.

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Ambulatory surgery center valuators and ASC buyers have all types of methods for determining the value of your center: Comparable Sales Approach, IRR, Income Approach, Asset Value Approach etc. The truth is your center is worth what someone is willing to pay for it. At virtually all ambulatory surgery center (ASC) business meetings, you will be able to attend sessions regarding the Ambulatory Surgery Center Valuation Companies, which are invariably taught by business valuation professionals. To delve deeper into the reasons why a hypothetical fair market valuation can be so different than a center’s real market price, let’s first get a firm understanding of Fair Market Value (FMV).  It’s the common, default standard way to talk about an ASC’s value. The Internal Revenue Service defines Fair Market Value as “the amount at which property would change hands between a willing seller and a willing buyer when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and when both have reasonable knowledge of the relevant facts.”

Similarly, Section 1877(h)(3) of the Social Security Act defines fair market value for purposes of Stark regulations as “the value in an arm’s length transaction, consistent with general market value.” Specifically, the regulations (420 CFR 411.351) state: “Fair market value means the value in arm’s length transactions consistent with general market value. ‘General market value’ means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party; or the compensation that would be included in a service agreement as a result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition or at the time of the service agreement. Usually the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement.”

The fair market value world is not the real world; it is hypothetical. It’s highly regulated, and it assumes that willing buyers and sellers exist, that the power among them is proportionately distributed, and that they are under no compulsions. It defines the participants as very specific and predictable actors. It assumes that the players are rational and consistent in their dealings, including the appraisers who theoretically use fair judgment when they apply certain methods for the valuation. In other words, FMV is a value world of hypothetical willing buyers and sellers in hypothetical business transfers. Keep in mind that the business valuation practitioners who use FMV study corporate financial theory and public accounting, and by their nature, they will lead to conservative valuations.

‘But,’ someone will say, ‘FMV does incorporate real life data when it uses bona fide sales prices for assets of like type, quality, and quantity.’ I would counter that it’s basically impossible to find a “comparable” sale to your own ASC.  In the valuation, are they really comparing oranges to oranges or is it an orange to lemons? For previous bona fide sales to be comparable to your future sale, they would have to have taken place in the exact same market at the exact same time of acquisition that you yourself are selling your ASC. Unless you and your twin brother both own ASCs side by side on the same street and are selling them the same day, it would be impossible for any two ASC sales to be effectively compared.

Furthermore, the FMV business valuation is based on the assumption that a sale is taking place between a hypothetical, predictably rational buyer and seller. In fact, the real world is populated by real people, whose actions are very unpredictable, not subject to consistent definitions, and who engage in actual transactions with unpredictable outcomes.

I have many conversations each week with physician owners of ambulatory surgery centers, and they always ask me what their center is worth. In most instances, they want to know the highest and best value possible in an actual sale of their center. My typical response is: “Something is only worth what someone is willing to pay, and it is not worth a penny less.”

While some surgeons believe that I am not saying much when I give that answer, I am actually telling them a lot. At any given moment in time, your ASC has many definitions of “worth,” and they all depend on the purpose of the valuation, i.e. which value world in which the valuation is taking place. To understand this will require a paradigm shift away from the default way of thinking, as well as a recognition that many ‘value worlds’ exists.

To make a contrast against the hypothetical world of FMV, Market Value is the real world value of your surgery center. Market Value, simply put, is the highest purchase price and best terms available for this particular surgery center in the open and competitive marketplace.

FMV is a value world defined by federal law and administrative rulings and controlled by the business valuation professionals, whereas the Market Value world is defined by the actual market place and controlled by the investment bankers (financial intermediaries).

If you want to sell your surgery center for peak price and terms, or to know what the value of your surgery center would be in such a situation, then you must look in the market value world. In essence, you are searching for the most motivated buyer at a specific point in time, which has the compulsion to buy. To get to this, you must conduct a broad auction. Compulsion to engage in a transaction usually works against that party’s interests. A “motivated buyer” is likely to pay more than a rational price to acquire an asset. It works every day on eBay.

Additionally, something that’s not readily spoken about in the “What Is Your ASC Worth” conference sessions is the fact that bona fide offers must be taken into consideration when doing a fair market valuation. In other words, the appraiser has no leeway in allowing the market value to influence the FMV (think rock, paper, scissors….). Thus, you want a well-executed broad auction process before a fair market valuation is done, even if you have a strong desire to sell to a particular buyer.

All the valuation professionals will tell you that a hospital can only pay “fair market value” for a physician’s interest in an ASC. This also goes for the ASC management companies that are looking to partner with you and the hospitals. They will hire a valuation professional trained as an accountant or in corporate financial theory to conduct a conservative fair market valuation. While that is true, what they never tell you in these sessions is that a bona fide offers are fair market value. In other words, if you have bona fide offers (conservative or not) and present them to the valuation professional, they should use that data in their fair market valuation. The valuation community has defined a hypothetical willing buyer as any likely buyer. Therefore it’s to your benefit to hunt down “any” likely buyer … prior to the hospital engaging a fair market valuation professional.

So in practice, it should come as no surprise that these two worlds – the hypothetical world of fair market value and the real world of market value – are sometimes in conflict about what a particular ASC is worth. You hear about it all the time: ‘The hospital thinks my center is worth x, but I know it is worth x squared.’

Think about which world to engage with the same way you would think about the services of any other industry. Would you go to a spine surgeon if your ACL was torn? The only way to truly know what your ASC is worth is to shift your paradigm from the hypothetical world of valuation professionals to the real world of investment bankers. Fair Market Value likely won’t reflect the highest price that could be obtained if you sold your surgery center. On the other hand, Market Value will reflect that, and it can also influence the FMV.

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In the words of one of our previous presidents, it depends on what the definition of is, is. There is no typical deal.

So when we look at pricing in today’s market we typically separate it into a few buckets.

One bucket is minority purchase and another is majority purchase. Additionally, we separate physicians and corporate buyers because typically corporate buyers end up with a management agreement and physicians do not, thus you can justify the difference in minority purchase prices for those two.

For physician syndication – which is typically minority without a management contract – we are seeing 2.5 to 3x trailing EBITDA for in-network centers, which is really nothing new.

When physicians buy in, they typically do the multiple of Trailing Twelve Month EBITDA valuation. There are also cases where the operating documents state that the fair market valuation will be done no more than every 12 months, thus a center that was valued about 6 months ago and added cases over the last six months is really below the stated multiples because it is not the Trailing Twelve months.

The valuation professional understands that from your standpoint a discount cash flow, Gordon Growth Model should be employed and then the value is represented as a multiple of EBITDA.

Minority purchase pricing for corporate buyers is more along the 3 to 5 multiple of EBITDA range. For majority buyers we have seen as high as double digit multiple for deals, but the typical range is 5-8. The higher multiples-double digits-for deals are where there have been some doctors added recently. The reason is because the DCF is completed, then the multiple of EBITDA is higher because the cash flow from the added cases are entered into the discount cash flow model.

Some of the buyers are becoming more creative. Some are paying higher purchase prices but getting a higher management agreement, more pass through cost or increased billing and collection agreements. Some are doing away with the management fees but increasing the pass through and the billing and collection rates compared to what they have gotten in the past with a management agreement. This sometimes is acceptable to the seller because the standalone billing and collection companies charge as high as 6 percent.

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Ambulatory surgery centers (ASCs) are highly dependent upon the cases that physicians choose to bring to the center. One of the most impactful reasons some surgeons choose to bring cases is their ownership position in a particular center because they have more influence on a list of items. So the reason that you would want to devalue the shares is so that surgeons or more surgeons have the ability to buy equity in the center because some centers have significant buy-in prices. I always say that you do not want to make money on your syndication; you want to make money from your syndication.

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With interest rates near historic lows you may consider adding debt to the center. This is referred to as a Dividend Recap in the Investment Banking world. Ambulatory surgery centers are valued on a fair market method based on the ASC’s earnings before deducting interest, taxes, depreciation and amortization (EBITDA). This gross earnings number is then multiplied by a fair market value multiple, minus the ASC’s long-term debt, then multiplied once more by the percentage to be acquired by the physician buyer thus the additional debt reduces the ASC’s valuation. The borrowed money could be distributed to the existing owners, allowing them to keep essentially the same money in their pockets and allowing the new surgeons a lower buy in price.

There are some alternative methods along the same line. Some of these strategies include selling fractional interests or diluting the shares by a stock split, locating a list of third parties that are in the business of lending money that is not associated with the surgery center that will finance the investment, etc.

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The fair market value multiple paid by national ASC companies and health systems (historically in the 5x to 8x range) should be distinguished from the 2.5x to 3x multiple an ASC typically receives when selling interests to an individual physician for a minority interest. The justification for the lower multiple used in a sale to physicians is tied to the limitations and restrictions imposed on their ownership interests (e.g., minimal voting rights, transfer restrictions, buy-back provisions and a non-compete).

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When we discuss value drivers we are referring to them from the buyer’s prospective. The value drivers in large part are within the pricing criteria and knowing these will help you make adjustments to your center if possible to get the best possible value for your center. So what are the factors that most significantly affect the value of your ASC to an outside investor like a corporate partner or management company?

  • The stability of the center’s cash flow
  • The growth prospects of the center
  • Its underlying operations
  • Any unique differentiators.

Valuation multiples are determined by the outlook for future performance and therefore are extremely sensitive to growth prospects and risk factors. There are four main pricing criteria that have either a negative or positive impact on price.

1. Competition/barriers to entry. The multiple will decrease if there are few barriers to entry for other ASCs in the area, if there are several competing partnerships within your center or if physicians have ownership in multiple facilities. If it’s unlikely that you’ll experience success recruiting new partners or users, the growth prospects are diminished, driving a discount in ambulatory centers sale valuation of the business. The multiple will increase if there are significant barriers to entry for other ASCs (such as requiring a certificate of need), if there are few competing partnerships or if physicians do not have investment interests outside of your ASC. These factors create multiple recruiting/growth opportunities for the partnership and receive credit in valuation.

2. Reimbursement risk. The multiple will decrease if your center has high out-of-network revenue, if it has a specialty concentration facing significant Medicare changes or if there is other exposure, such as workers’ compensation reform. Out-of-network payments can boost net collections, but centers with high levels of out-of-network payments are generating a level of cash that some buyers will see as unsustainable in the future. The historical trends of the business are important, but what you are really buying into is the future cash flow. If you expect that to decline, you’re going to discount its value. The multiple will increase if your center has contracted with major payors, if your center’s specialty is in a “positive” Medicare concentration (such as ENT or orthopedics) or if there are no other exposures.

3. Partnership profile. The multiple will decrease if a significant number of your physician partners are nearing retirement and your center has no contingency plan to replace them. Another factor is partner concentration. Having too few partners sharing sale proceeds may create incentive for them to slow down or eliminate their surgical case production. Also, having a dominant partner creates risk that there is too much reliance on a single individual.

4. Growth prospects. The multiple will decrease if there is limited growth opportunity from existing partners, if there are few recruiting prospects or if there are capacity concerns. The multiple will increase if your center consists of partners with growing practices, if there are excellent recruiting prospects, capacity to grow and a diverse case mix.

Buyers consider two types of growth when making these determinations — organic and external. Organic growth depends upon the maturity of the individual partner’s practices. Each partner is interviewed individually to determine their objectives and ability to bring additional surgical cases to the ASC. External growth is analyzed based on the probability of recruiting new physicians to the partnership.

Uniqueness or differentiators has not been spoken about very often, but this is something that specific buyers value.

The final factors that may influence value include the age of current physicians and commitment from selling physicians. Buyers are often worried that they’ll cut a big check to the physicians for the center and as soon as the transaction is final, the surgeons will in-house retire or spend more time on the golf course than in the operating room. You need to evaluate this with your current surgeons and be prepared to overcome this. This can be done with a succession plan in place, with strong non-competitive agreements, etc.

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When we speak about pricing the default is to discuss it in terms of multiples of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), but my disclaimer always is that in reality the devil is in the details because you can influence EBITDA.

When we look at pricing we typically break it down into two main categories: control equity interest and non-control ownership interest (aka majority ownership and minority ownership). Please note that when we refer to control and non control we are referring to financial control and not clinical or business decisions.

For minority interest purchase pricing, the lowest that I have seen for functioning centers is 2.5 times EBITDA. We have gotten some lately in the 5 times EBITDA range, with the bulk of transactions in the 3-4 range. There are some instances when the purchase price has been less, but that was for centers in need of a turnaround or centers that went dark, and then asset value comes into play.

When buyers or investors look at a potential deal or investment or purchase, they look at the potential deal through the risk lens. The riskier the deal that the investor sees, the lower the offer price will be. The lower the perceived risk, the higher the offer will be.

With majority interest purchase prices, the lowest that I have seen for a single surgery (as opposed to buying multiple surgery centers in one transaction), the lowest multiple of EBITDA that I have seen is 3.5. The highest that I saw in 2011 was 9 times EBITDA, with the majority falling in the 5-7 range. The 9x was a single specialty pain surgery center that actually had a significant amount of out of network business, and the buyer was a motivated financial buyer involved in their first healthcare transaction. The strategic buyers were offering numbers in the 3x-4x range.

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There are several key elements that contribute to the pricing of a center. The pricing is greatly dependent upon the strengths and risks of the ASC being bought.

  • Is the center located in a Certificate of Need (CON) state? This gives you more control over the market (and greater value) compared to a non-CON state where anyone can set up shop across the street. States with tough CON laws make it more difficult to open new ASCs and thus raise the value of existing ASCs.
  • What are the payor contracts like? The stronger the in-network contracts the better. If you have long-term third party contracts that have solid reimbursements, then the investor sees this as low risk to their reimbursement vs. many buyers who view out-of-network centers as having significantly more risk.
  • Physicians – do you have a significant number of physicians and good physician mix and cases? Also, is there potential for growth through syndication (recruiting more physicians and cases)? If you are reliant upon only a few doctors and their cases, then this is viewed with a great deal of risk.
  • How many centers are the physician investors invested in? If the physicians are only invested in this ASC and have strong non-compete clauses the buyers will see this as a strength vs if they are invested in multiple centers and do not have non-compete, they buyers will see this as very risky and the buyer pool will be low if any.
  • Assets – will the buyer have to invest in new equipment or not?
  • Amount of interest sold –  is it minority or majority interest?
  • Number of ASCs in the area – if there are too many ASCs in the area, a center up for sale would have a lower value.
  • Nearby hospital buying up ASCs – if a hospital in the area is buying up ASCs, usually in partnership with physicians, this will take volume away from unaligned ASCs and thus lower their value but if there are Hospitals in the area that have a desire for a surgery center and you are an attractive option for them that could increase the buyer pool thus the price
  • Managed care contracts – ASCs that have strong contracts with insurers are at the high end, while out-of-network ASCs are seen as riskier.
  • Financial markets – the more available the credit and equity markets are, the higher the purchase prices are. This is because new buyers come into the market, which increase the buyer pool which drive down the investors’ required return on invest. In other words, the buyer does not need to make as much money on the investment to justify the purchase. Think of it in terms of residential home prices: when everyone with a pulse could get a loan, the higher the houses prices were.

Those are the science answers behind how prices are determined, but some of the least spoken about questions are:

  • Who is the most motivated to purchase your surgery center at that point in time?
  • How many people are bidding on your center?
  • Who has money to spend?
  • Who has use it or lose it money? Some buyers are required to deploy their money by a certain time or they will have to return it.
  • Which buyer is hungry for a deal?
  • Who is trying to show growth on their balance sheet in preparing to go public?
  • How well do you understand the value drivers of your center and the ability to mitigate any perceived risk? For example, we have represented two centers where one had one doc and the EBITDA was over $1 million with solid growth in both the third party payers and the syndication at 100% of Medicare, and another that had two docs and a center with similar EBITDA. We offered insurance products in the deal to mitigate the risk, which in turn allowed the buyers to get comfortable with moving forward with the deal.

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One thing that I want to point out that is not typically spoken about is the buyer’s compulsions. I understand the tenants of fair market value and under no compulsions part. In the real world of transactions, buyers and sellers have compulsions. For example, if there is more money moving into the market and buyers need to do deals to satisfy their investors, or if they have a Midwest footprint and want a Southwest footprint, they will be willing to pay a little more for the ASC in the Southwest compared to an identical one located in the Midwest. Thus having multiple buyers with compulsions will drive up the prices, because in reality it relies on supply and demand.

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For solid centers there are more buyers than sellers, thus supply and demand and the story that supports the center’s growth drives up the prices. Even for centers that 5 years ago would be considered risky, prices are going up as long as the risk is considered acceptable. Now you might not get someone to buy a majority interest in a center with a few risks, but we are getting a higher multiple as long as the profits are there and there are some mitigating factors to those risks.

For example, we sold a center that had one doctor owner and a couple of other physicians that were doing cases in the center and their EBITDA was about 1.2. The reimbursements were par with Medicare. The one physician wanted to sell 50% of the center. Other than the risk associated with the possibility of that one doc getting run over by a truck, the risk to that revenue is low. So we increased the insurance on that doc, the buyer purchased 35% at around 5X and the other 15% at 3x to hold for new docs coming in and the buyer took a management agreement with billing and collections at 5% with minimal pass through. This was obtainable because we had multiple buyers interested and because of the story/profile of the center.

Most people will tell you that the majority range is 5-7, some might say 7.5, but with many more buyers than sellers you can push the multiple up a ½ turn to a turn and get better terms. You can get multiple buyers to go higher together thus conforming to the tenants of Fair Market Value. Now there are centers where the multiples are not going up, but that is because there is little interest in those centers and that has not changed other than those owners realizing that they cannot turn it around by themselves.

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If you are doing it after the fact, you will make adjustments for one-time expenses and various unnecessary expenditures. This process is called “recasting” or normalizing earnings. These adjustments to income statements and balance sheets allow buyers to appreciate the maximum profitability of the center and the true value of the assets and liabilities. Keep in mind physicians will want to maximize value capture, and buyers will want to minimize it, so potential investors will scrutinize all add-backs. This tug-of-war will be part of the due-diligence process, and you just want to maximize your profits as a starting point.

To start, use the company’s EBITDA for the appropriate period. Then make the adjustments for discretionary items. Doing so will not only remove one-time or extraordinary income and expenses, but also will adjust for accounting anomalies, identify owner compensation, owner “perks” or fringe benefits, non-cash expenses and other items that are common in privately-held businesses.

Below are some of the most common examples of items which could be recast, but nothing short of going through the income statement line by line in search of profits will do.

1. Compensation, both for owners and employees. Not all of the physician owner’s compensation is recast, but the amount of salary or bonus that a physician owner pays to himself and others is largely discretionary, so it can be adjusted. Compensation above and beyond the typical market value can be added back to your pre-tax earnings. So if your main employee is paid above market rate because of their loyalty to you, normalize their pay. Do the same thing for family members employed by the business.
2. Owner perks or fringe benefits. In addition to cash compensation, most ASC owners receive numerous perks or benefits that are not required for the daily operation of the surgery center. For example, while a vehicle may be required, a luxury automobile or SUV is not normally necessary. There may also be discretionary expenses reimbursed to the physician owner which may not be applicable to a new owner and don’t affect the profit performance of the ASC. These include items such as:

  • personal travel and entertainment expenses
  • vehicle expenses beyond what is absolutely necessary
  • unearned family compensation, including wages, vehicles, trips or insurance
  • a large life insurance contract or pension plan
  • personal use assets, such as a sailboat, plane or a condo in Hawaii
  • expenses paid to another company owned by the same seller
  • excess compensation, i.e., compensation beyond what the owner is willing to receive post sale or beyond the amount required to hire competent surgeon

3. Employee-related items. Certain employee-related items may be changed post-sale, so they can be added back to pre-tax earnings.
4. One-time items. Adding back one-time, extraordinary or non-operating income or expenses is meant to remove items which appear in the financial statements, but which are either unlikely to be repeated in the future or are unrelated to the ASC’s operations, so they won’t be incurred by a new owner. Common examples include things such as:

  • donations
  • bad-debt expenses
  • uninsured losses
  • marketing and trial advertisements
  • one-time legal lawsuits

5. Discretionary business practices. Other business expenses which won’t typically be incurred by a new owner into the future, and which may therefore be recast, include:

  • business insurance beyond what is absolutely necessary
  • excess rent (pay close attention to this if you own the underlying real estate)
  • patient incentives
  • overpaid expenses done to reduce taxes
  • lump sum bonuses paid to employees

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