Selling Equity in Your ASC: Identify Your Motivation to Make the Right Decisions
Selling equity in your surgery center is a big deal (no pun intended). First, you will be living with your new partner(s) for a very long time. If your new partner is a for-profit corporation, there could be significant changes to the way business is done and the "vibe" of your center. Second, the price needs to be right. You can only sell this equity once. While there could be a secondary offering, a resale, or — in the event the purchase agreement allows — a repurchase, this will be the biggest economic event that happens to you, your investors and your staff.
Since this is such a "big deal," it is critically important that you understand what is motivating you to make this decision. Most ASC equity sales revolve around one of three motivating factors. By considering the following three questions, you can better prepare your strategy and execute it with confidence.
1. Are we selling to take money off the table or reward the original investors? This assumes that your ASC is doing well financially and that there is a reasonable, if not substantial, EBITDA and ROI. Most equity buyers will pay a multiple of EBITDA less any long-term debt. Companies buy as little as 20 percent but as high as 51 percent. Usually, if they buy in at a lower percentage they have an option to purchase more at a later time. Multiples are increased, or discounted, because of out-of-network (most purchasers will lower multiples by two or three times for OON centers because they recognize that if the center has to go in-network it will reduce revenues), physician specialties, size and capacity of the center (this is often called "landlocked"). If this is the reason why you are selling, you need to maximize your EBITDA (increase procedures and revenue and decrease your operating expenses) and negotiate for the highest multiple.
Assume your center is doing $8 million in revenues and $3 million in EBITDA and a corporate owner is going to pay six times. If the corporate owner was buying 51 percent (to obtain control), you would get $9.18 million (before legal and other fees) to share with your investors. Let's also assume this equity partner is going to provide management of the center for 6 percent of collections (this is the "usual and customary"). After the transaction, you went from distributing $3 million to distributing $1.23 million ($3 million less management fee times 49 percent). Do the math and you'll see that if you didn't sell, you would have earned the entire equity purchase price if you kept the center for 5.2 more years. If you increase revenue and reduce your expenses, the payback is quicker. Consider strategies for increasing your EBITDA. For example, if you sell a small amount of equity to new physicians, you would increase your revenues, improve EBITDA and reduce dilution. Your returns could be significantly better.
If you improve your billing and reduce your expenses, you increase EBITDA, improve your payout and save an equity sale for a higher payout at a later time. Don't be in a rush (remember, you can only sell this once). Moral to the story — know what you are giving up and what you are getting if the motivation is to take money off the table.
2. Are we selling to improve management and operations? This may be your motivation if you are not satisfied with the financial returns and/or the center is not delivering the efficiencies and satisfaction you expected when it was established. Problems could be related to physicians (personalities, scheduling), investors ("deadwood", insufficient capital), staff (morale, inefficient, wrong hires), billings and collections, or contracting.
If this is your motivation, your decision should be based upon who can provide the management services that fit with your center. Like physicians, companies tend to specialize (there are well established GI and ophthalmology companies) — you'll want to know their experience in your type of center and check with references. Companies also tend to regionalize. There is a big difference between managing a center in California and one in Texas. There are differences in managing an OON center or one where there is a single, dominant payor. You should get a clear understanding of how the management company will operate at your center (on-site people, corporate resources). Once you are satisfied that you are making the right management decision, then you start to consider purchase price. If your center is profitable, see the first question. If you center is not profitable, see the last question.
3. Are we selling because we are not getting the returns we expected or cannot make a profit? This may be your motivation if your center has not issued distributions or, worse, is hitting you with capital calls. This is probably the result of an inadequate syndication effort (not enough physicians with a vested interest in the center) or insufficient working capital. Usually, a company will purchase equity — and take a management contract — with the idea that it will re-syndicate the center by selling part of the equity it buys to new physicians. For this to work, it will need to buy low and buy a sufficient ownership interest to cover its requirements and the syndication. The flip side to this is that you are selling low and selling a substantial position in the center. You are getting a partner (who you don't know) who will then sell to new partners you won't know (or know and didn't want in the first place). You are selling at the bottom of the market. To avoid capital calls, centers have been known to "sell" equity where the purchasing company assumes some of the debt. This is the time to critically evaluate three things: your management structure, your physician partners and your local market conditions. Before you sell, you may need to change management (see question above), resyndicate the ownership to physician investors or adjust your contracting strategy based upon your local market. Remember that if you sell at the bottom, whomever you sell to will likely do these three things and you will have lost the opportunity.
Remember that selling your center is not simple and it is not the answer to all your problems. The road is littered with equity sales that have soured once the purchase price has been distributed and spent. Think through these questions carefully and be sure you are making the right decisions for the right reasons.
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