The following are excerpts from Becker’s 19th Annual Spine and Orthopaedic Conference held June 16-22, 2022 in Chicago. Jim Freund, Managing Partner of ASCs Inc. was on panels addressing Is it the Right Time to Sell? What Happens Next? And ASC Management and Transactions: Big Trends for 2023 and Jason Winokur and Stephanie Tarry of ASCs Inc. discussed how to Maximize the Value of Your ASC/MOB Real Estate.
- Why are more ASCs and practices considering strategic partnerships than ever before?
- How to find the right strategic partner and get the best price and terms for your ASC business and/or practice.
- How to realize maximum value for ASC/MOB real estate and why hiring a national broker has significant advantages.
How the right strategic partnership enables physicians to retain much of their independence:
While that may sound contradictory it is essentially the only way many surgery center and practice owners will continue to realize the benefits that being independent have provided.
Today buyers clearly understand that for joint ventures with physicians to be successful they need to ensure that they retain the same characteristics that led them to develop their own businesses in the first place. In addition the right partner brings economies of scale and support services that are essential in competing in today’s highly competitive and fragmented healthcare environment. These include but are not certainly not limited to succession planning, physician and staff retention and recruitment, partnership creation, contracting services, purchasing and supply cost management, business development, marketing, IT, HR, compliance, accreditation, business office, budgeting and the myriad of other services that are so challenging for individual groups to manage.
So when you think about your future and what is best for you and your group, it is important to consider all your options. The right strategic partner could be that answer. Exploring all of the potential partnership options is a time consuming and complex process but is absolutely essential when it comes time to consider a strategic partnership.
How to find the right partner and benefit from a successful strategic transaction
The sale of a surgery center business, surgical hospital or practice is likely a once-in-a-career event which puts the sellers at a distinct disadvantage when dealing with experienced buyers. Having a team with the expertise, knowledge and experience that comes from managing hundreds of successful partnerships representing the best interests of the sellers is really the only way to ensure that you realize the best outcome.
Sellers are advised to be very involved in the process and to take specific actions to realize the best possible outcome. These include:
- Clearly define goals before embarking on this process, both as individuals and a group because collectively you need to make a decision and if you have agreed upon objectives it makes it much simpler to analyze your options.
- Gain the attention of the most qualified buyers and best possible strategic partners by creating a comprehensive confidential information memorandum that provides all the relevant and critical details of your practice and/or ASC, including growth prospects.
- Build a secure data room with all the detailed information that a prospective buyer will need to review in the format that will enable them to evaluate your organization.
- Set expectations early on with prospective buyers regarding your process and the timing, along with expectations and delivery dates, so you can keep this process on track.
- Understand that a strategic transaction is a complex and time-consuming process that can stretch to a year or more.
- Each prospective buyer has their own business model and it is important to make sure that they are the right fit for you and that they have the resources, expertise and track record to achieve the representations that they make to you.
- Achieve the best possible outcome by engaging in a competitive process with multiple qualified buyers. These include management companies, hospitals, private equity backed firms and other investors. There needs to be real competition to realize the optimum financial and nonfinancial outcomes with the most compatible strategic partner.
- Engage an experienced healthcare attorney to review all the transaction documents.
- Ensure that the ASC rent is fair market value and that the lease contains terms that facilitate the sale of both the business and the real estate to ensure you realize maximum value for all your assets.
- Clearly understand that there is no obligation to move forward with a transaction unless you find the right partner, at the right price and with the right terms
How to realize maximum value for your ASC/MOB Real Estate:
Increased demand for medical real estate: Due to the long-term success and profitability of surgery centers, excellent credit history and rent coverage, and the likelihood that the ASC/MOB will remain in the same location for many years to come, ASC/MOB real estate has become very attractive to real estate investors. This is reflected in the current competition to buy and leaseback ASC/MOB real estate and the high multiples of 14X to 19X rent being offered. Sellers can realize high selling prices, no change in rent, and retention of control with a NNN lease.
Strategy and valuation: If the physician-owners of the ASC business, or some of them, also own the ASC real estate, it is important that your advisor be experienced in valuing and selling both assets and to consider both assets simultaneously in order to maximize the value of both. The value of the ASC business will depend on the current EBITDA and growth prospects for the ASC, and of course rent impacts EBITDA. In almost all cases, the buyer of the ASC business will not be interested in buying the ASC real estate, but will want the rent to be fair market value. The real estate will most likely be purchased by a real estate investor who will base the purchase price on the rent and terms of the lease. Your advisor’s job is to maximize the value of both without leaving any money on the table.
This is accomplished by determining fair market ASC rent for the area and advising the sellers on terms of a new long term lease that maximize the value of the real estate while also maximizing the value of the ASC business. This leaves the physician-owners in control of the property (with a NNN lease) while maximizing the value of both the ASC business and the ASC real estate.
Timing is important:
To obtain maximum value in both the strategic transaction and the sale-leaseback of the ASC real estate, your advisor will advise you on timing and should ensure that the ASC business sellers have a succession plan with a long time horizon which will be required by the buyers.
To maximize the value of the ASC real estate your advisor should ensure that the sellers put a fair market value 10+ year NNN lease in place prior to the sale of the ASC business while the owners still have controlling interest in the ASC and can unilaterally make changes to the lease.
Use an experienced ASC broker. Local brokers who do not specialize in ASC/MOB real estate typically lack the knowledge to be able to advise on a lease that will both maximize the value of the ASC real estate and the ASC business. In addition, they usually market to local buyers. Most often there are few local buyers who are educated on the value that ASC real estate represents. Brokers who have a network of well-funded national buyers will bring in higher offers, typically within 30 days from the listing date.
Obtain competitive bids: Brokers with national buyers will solicit and leverage multiple competitive offers to get the sellers the highest price. Sellers will always get a better price and terms when multiple national buyers are submitting competing bids. Sales should be made when there are multiple buyers seeking to buy ASC/MOB real estate, which is currently the case.
Partnering with a strategic partner that will agree to a long-term lease. Some ASC management companies and private equity companies will not allow leases of more than 5 or 7 years. This will greatly reduce the number of buyers interested in the ASC real estate and will lower the value of the real estate.
In summary, experienced advisors can maximize the value of your ASC business and ASC real estate by preparing the asset for a sale at the highest price and best terms to buyers that are compatible with your goals and culture. These transactions are time consuming and complex and to get the best results it is important to have a proven process that generates competitive proposals from the best prospective buyers.
About ASCs Inc. - For over 20 years the industry leading team at ASCs Inc. has focused exclusively on representing the best interests of physician-owners who are considering selling an interest in their surgical center, practice or their real estate. By leveraging the knowledge, experience and expertise that comes from successfully managing over 300 complex and time consuming transactions our clients realize the best possible results using our risk-free process.