Matt Searles, managing partner at Merritt Healthcare, offers 10 key points to consider when selling interest in an ambulatory surgery or endoscopy center.
1. First, do the spadework. When physicians are contemplating selling interest in their center, the first step should be to undergo an operational and financial review. Before talking to any would-be buyer, thoroughly review finances and operations of the facility. Although purchasers usually focus on trailing 12-month earnings as a basis for their valuation, there is still a chance to identify and remove items from the operational side. These changes can affect the valuation. Look for one-time, non-recurring expenses not related to operations.
2. Pare down potential buyers. Develop a list of buyers and then eliminate the unlikely candidates. The selling physicians will be giving potential buyers inside information about the facility, which should not get into the hands of competitors. To mitigate that threat, focus on entities that would truly have an interest. "Get a good handle on who is buying," Mr. Searles says. "Don't send your information to someone who will not be interested." Keep in mind that while there are many ASC companies, relatively few are the really desirable candidates: those who are prepared to offer high multiples. This group is shrinking with recent consolidations in the industry.
3. Consider each offer's strategy. When evaluating potential offers, it is useful to understand each buyer's motivations. A buyer's strategic focus might be a hospital partnership, accumulating geographic locations or an interest in single specialty or multispecialty centers.
4. See hospitals as potential buyers. The local hospital that was once the foe of the surgery center might now be a potential friendly buyer. Hospital deals can be quite lucrative. While national ASC companies buy no more than 60-65 percent of a center and often less than that, a hospital may offer to buy 100 percent, convert the center into an HOPD and enter into a co-management agreement with the selling physicians. However, depending on the size of the market, there may be only one or two viable hospital purchasers to choose from.
5. Decide how much interest to sell. Physician-owners have a choice between selling all of their interest in the ASC or only part of it. This is an important decision because purchases of majority interest offer much higher multiples. For example, if 51 percent or more is sold, the multiple is 6-8 times, but if less than 51 percent is sold, the multiple is only about 4 times.
6. Consider selling a majority interest. Physicians often resist selling a majority interest because they are worried about losing control of the center. However, giving up a majority interest does not necessarily mean ceding control. "The buyer views the physicians as the revenue-generators, so he is going to want to cooperate closely with them," Mr. Searle says. Drawing on his experience negotiating sales of majority interest, he adds: "I have not found that physicians were told what to do. The buyers are very collaborative."
Physicians also often think they will benefit more from earnings on retained shares than from the proceeds of selling those shares, but this may not be the case. As already stated, multiples are much higher when a majority interest is sold, and the income from such sales can exceed potential earnings for many years to come. Furthermore, capital gains taxes for the seller, at as little as 15 percent, are lower than ordinary income taxes on earnings from shares, which amount to as much as 35 percent for the tax bracket applicable to many physicians.
7. Compile a comprehensive report. The seller should prepare an "information memorandum" that is typically 40-60 pages long. Since it will be the purchaser's introduction to the facility, it should be comprehensive and carefully written. The information memorandum should cover financial and operational performance, the background of the facility and the competitive landscape. The document should describe its owners and –– this is key for attracting buyers –– the future growth potential of the facility.
8. Don't hide the center's weaknesses. Make sure the comprehensive information memorandum represents a fair view of the facility, warts and all. "Include the good, the bad and the ugly," Mr. Searles says. "In addition to all the great aspects of your ASC, mention the ones that are not so good." For example, if a key physician is retiring, and that would reduce the center's volume and perhaps its value, it's important to reveal this early in the process. "You can lose some credibility with the buyer if you send limited information in the memorandum," he says. "The purchasing community is sophisticated."
9. Know how far to push. While there is some room for negotiation with the buyer, the seller's expectations of potential buyers need to be realistic. "You can only push them so far in terms of valuation and governance issues," Mr. Searles says. "They may back off. I've seen it happen where a buyer just bows out." The selling physician may think he is just pushing the envelope a little with an added demand, while the buyer may see it as evidence that the physician would be a difficult future partner. "By all means seek the best possible terms," Mr. Searles says, "but pushing beyond reasonable limits will cause purchasers to back away from your deal."
10. Be patient. In addition to properly preparing for negotiations and understanding what to expect, the seller has to be patient. "Don't rush it," Mr. Searles says. "Purchasers aren't going away tomorrow, so don't be in a hurry." The large ASC companies need time to evaluate a facility. It can take 6-12 weeks for them to decide on a purchase. In this period, "there is a constant back and forth between the buyer and the seller," he says. For example, the buyer will ask for follow-ups, arrange visits and collect references.
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