How should an ASC handle underperforming surgeons?

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...

How do I know what buyers are interested in my ASC?

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...

How do you understand the art of sales prices – who has use it or lose it money, what management company is going public, who has a strategic need for a center in a certain area, etc?

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...

What should someone expect from the ASC buying and selling processes?

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...

What are the different marketing processes that can be utilized when selling a surgery center?

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...