What are the different types of potential buyers for my outpatient surgical center?

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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Category: Selling My Ambulatory Surgical Center

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