Why would I want to sell my ASC?

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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