5 Common Questions on How to Effectively Market an ASC
Ambulatory Alliances, tackles five common questions on how to effectively market an ambulatory surgery center for a sale.
Q: What are the different marketing processes that can be utilized when selling a surgery center?
Blayne Rush: 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 indentified and speed and confidentiality is a big concern. A broad auction process is used when you want to cover all of the markets and want to maximize your sales price and terms. The seller should match its needs with one of these marketing processes.
Hybrid approaches can be and very often are used. For instance, a negotiated transfer process may involve several buyers simultaneously, with each 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, however, 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, I am not a fan of the negotiated sale approach because, in its purest form, it removes the biggest leverage that an owner has 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 now want to sell it to your partner. That might be a situation where the negotiated process is acceptable, but 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 into 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 than 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, it will be one of the higher offers and be more flexible with terms.
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 is targeting a short list of potential buyers and working to get offers from about three of them and negotiating 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 the last ASC business conference I attended, I was having a conversation with the CEO of one of the strategic buyers that market themselves as turnaround specialists. They turn around centers then sell them. During that conversation, he asked me how I knew which buyers were the most active because he has found it tough because the hot buyers from the year before are not very likely to be the hot buyers this year. I told him 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 the that CEO's question. This approach is, as its name implies, a broad auction that maximizes the universe of prospective 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 you obtain the peak price and terms. Even if you want to sell your surgery center to, for example, the local hospital, we cannot stress enough that the broad auction approach is the process that you want to use. We have presented on this a few times when discussing "how to obtain the best price and terms." 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 your fair market value that the hospitals are looking for. If you engage the default method of FMV of engaging a FMV professional, the result will be a hypothetical value!
Q: What marketing materials do you need to prepare in order to market you center and what information is contained in each?
BR: Marketing materials often represent the first formal introduction of your ASC to the potential buyer/investor. They are essential for piquing 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 backup 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.
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 learn 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; this 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 the following:
• How many physicians are partners and how many perform cases at the center?
• Case mix
• In-network or out-of-network, and the percentage of each
• Size of the center (square footage, number of ORs, procedure rooms, etc.)
• Case volume
• Percentage of the overall cases are perform by each physician
• Years in the business
• Revenue and EBITDA
• Year-over-year growth
• If a CON state or not (if we are sending it out, we only give the general area of the country)
• Then 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 percent capacity, the capabilities are limitless, the rooms are huge, there are plenty of ORs and procedures rooms and 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 a disconnect in the process and not working to find the common ground. The physician's demands were presented as if in stone with no flexibility. Based off of the response or lack thereof rather, the introduction was not successful and it tainted the water. The takeaway of this example is that the process is important as is first impressions.
The seller memorandum is a written, detailed description of your surgery center that serves as the primary marketing document for the surgery center. It takes significant time and resources, and collaboration with 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 five years in length — as well as supporting assumptions and narrative. The projections must be realistic and defensible in the face of potential buyer's skepticism. This essentially tells the story of your surgery center and the deal. Your financial statements are recasted 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 way. Include a benefits stream that may compromise earnings, cash flow and distributions on a proforma 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 serves the following purposes:
• Designates the time period during which the confidentiality restrictions remain in effect.
• 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 exits 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. If an investment banker is engaged, he will typically 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 its leadership. There is significant rehearsal time that is intense and time consuming. The presentation format, for the most part, maps to the seller memo but is more concise. It contains additional levels of detail, analysis and insight into the growth potential of the surgery center (because future growth is what the buyers are buying).
Data room — The data room serves as the hub for the buyer due diligence. It is a location typically online where comprehensive detailed information about the surgery center is stored, catalogued and made available to pre-screened buyers. It contains the stage one and stage two due diligences. You can create folders within your data room that allows you to release information in folders (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 one, etc. Additionally, you can control the access, ability to download, upload, view, etc.
Q: How do you research the buyers and investors in your market?
BR: Researching the investor markets for most buyer universes is not complex. This process is one of the easy steps. For hospitals and health systems, look towards the hospitals in your immediate market and then the outlying markets for organization that might have an interest in putting a flag in the ground in your market.
For the ASC management companies, you can look at the ASC association directory, Becker's ASC Review's list of management companies, attend the ASC conferences as well as call the other ASCs in the state to see who they have as management companies. Additionally, conducting a web search is a great tool for locating the local and regional management companies.
For physicians you can look to the state provider databases, 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 with contact information and investment criteria that you can read. You can send out your teaser to the contacts listed.
Additionally, if you are thinking payors 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 payors, but things are changing.
Q: How do you choose what buyers and investors to contact?
BR: This goes back to the market, what you want and what market your surgery center fits into. If you center has an EBITDA of $600,000 and lacks a really high-level executive team, then there is zero reason to go to the financial markets. Thus you would look at the hospital and health systems that are in your market area or what 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. I know it is a lot of work but at this stage of the process you must create competition.
For example, I recently sold a center that had been in conversation with a hospital literally five miles from it for a few years. The physician owner engaged us and we created competition for the center by 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 percent and much more favorable terms with the hospital five miles away because it did not want the competition putting a flag down in its backyard. This was a situation where we allowed the rumors to fly because it helped drive up the price and yielded us with very favorable terms. It all started with the teaser being emailed and then a follow-up call presenting the teaser.
When looking at the ASC management companies, those 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.
Q: How do you market your center to those buyers and investors?
BR: 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 will also sometimes use email first and make contacts through LinkedIn. We do not post in groups but initiate direct one-to-one contact and mail depending on the market that we are targeting.
After the prospective buyer shows interest, we will discuss their desires with them and their ability to actually do the deal: where are their funds 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 discussions, 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 as well. After that time we will verify the investors continued interest and we might 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.
Blayne Rush, president of Ambulatory Alliances (www.AmbulatoryAlliances.com), is an SEC-registered and FINRA-licensed investment banker. He specializes in ASC brokerage; ambulatory surgery center turnarounds and increasing ASC valuations through physician recruitment and syndications; and access to the capital markets and capital structuring consulting for surgery centers, urgent care centers and radiation oncology centers.
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