When is the Prime Time to Sell an ASC?
Making the decision to sell
Mr. Downing began the presentation by discussing the current ASC deal market. The average is 4 to seven times EBITDA multiple. "That's kind of the range of what people are buying for majority interests," said Mr. Downing. National and local hospitals or health systems are one of the main purchasers for ASCs right now.
"Hospitals are seeing that whatever [the outcome of] healthcare reform ... clinical integration is happening and third party payors are demanding it," said Mr. Downing. "Hospitals and health systems are saying, 'If we own more of the healthcare spectrum, then if a dollar goes there instead of our hospital, we can still participate in it.'"
There are four main types of ASC deals: (1) sale of majority or minority interest, (2) sale of 100 percent of assets or conversion to HOPD, (3) co-management arrangements or (4) direct employment of physicians after sale. Market conditions are a huge factor when determining the timing of an ASC sale. "Right now the market seems fairly robust and continuing that into the foreseeable future," said Mr. Downing.
When considering a sale, ASCs also need to evaluate their local market to determine the level of competition. What is the ASC's relationship with its local hospital? Is the ASC in a certificate of need state? "If you're an existing center and have ability to expand, that makes you more attractive to a buyer," said Mr. Downing. Financial considerations of the ASC are also critical. These include cash flow, out of network percentage, pricing in EBITDA multiples, bank leverage (the opportunity to reduce debt liability), the need for growth and physician concentration.
"If you're very stable, that's what the majority owner players are looking at, and that's where you can have a more lucrative sale. That'll help in your decision over whether to take it to market," said Mr. Downing. "The other thing to think about is, people sometimes get valuations early on before they take the center to market to get an idea of their center's worth. They also do that for redemption and buy-in processes. Doing that can be a good thing to get an idea, but [these valuations] lag behind the market. You'll never know what it's worth until you go to market and get multiple bids."
The cost of the sale itself is another factor to consider. This includes valuation reports, legal and accounting reports, contract termination or prepayment fees and regulatory compliance. "You want to make sure you're in a position where you know what you're doing, and know you're motivations and the buyer's motivations. You don't want to spend money and not close a deal for a reason you didn't figure out early on," according to Mr. Downing. It is also preferable for ASCs to have their regulatory and compliance matters attuned before going to market.
After you decide to sell
How do you find the right buyer? "Some ASCs will be solicited," said Ms. Suh. "When you haven't been solicited, that's when you have to take the center to market and may want to engage a broker." Once in this process, Ms. Suh recommends ASCs look at the financial terms of the bids as well as the party making the bid. "For example, if it's a management company, you look into their track record and experience with ASCs that are similar to yours," she said.
Once you are entering negotiations with a buyer, Ms. Suh recommended ASCs consult their accountant. "Make sure whatever structure you agree upon is tax sufficient for you," she said. "This might be a good time for certain physician sellers to consider some pre-sale estate planning."
During the sale, it's preferred that ASCs continue business as usual. Closing can result in employee attrition and changes in staffing. "Speaking of employees, that's another key issue you want to start early. How are you transitioning your employees? What will happen to their benefits?" said Ms. Suh.
Other factors to iron out during the transaction include third-party consents, management fees, indemnification obligations and the center's new governance structure, which is an issue for the board. Third-party consents are a huge timing issue, according to Ms. Suh. The key agreement here is the lease, usually. In most cases, you can't sign the lease without the landlord's consent. It's recommended to get in front of this issue early and identify what, if any, third-party consents are needed.
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