As ASCs look to boost profitability, investors may consider selling a majority or minority interest in the center.
Many issues come into play with such a sale, including timing and potential ASC owners.
Panelists Jon Vick, president of ASCs Inc., Rich Searles, partner with Merritt Healthcare and Barton Walker, partner with McGuire Woods, addressed these and other issues during the Becker's ASC 23rd Annual Meeting: The Business and Operations of ASCs on Oct. 28 in Chicago.
Here are five key considerations:
1. Weighing the best time for ASC owners to consider selling
According to Mr. Vick, the best time to sell is when the center is doing well, has significant growth opportunities and the physician-owners are still some years away from retirement. Additionally, he said, ASC owners want to sell "to a company that values what you have accomplished, will recognize the value of your growth opportunities and can bring resources that will help your center continue to grow so that you can achieve your goals."
Mr. Walker referenced a client's quote as a good barometer of when it might be the right time for ASC owners to sell. The client said: "I don't feel comfortable owning a business this big. I don't like the feeling of having this much of my net worth tied up in this one company in what's essentially a liquid asset."
2. When ASC owners should consider engaging an outside consultant or investment banker
ASC sales are often multimillion-dollar transactions. Therefore, Mr. Searles said, it's beneficial for ASCs to engage an outside consultant or investment banker with specialized experience when going up against large corporate companies with a lot of resources.
Mr. Walker advised ASC owners at least talk to an outside consultant or investment bankers, even if they don't end up hiring them. "Most people in this industry are open to having a conversation and just telling you what they think of it and that can really be helpful and maybe help you think of some things you didn't think about before," he said.
Mr. Vick expressed support for engaging an experienced advisor or investment banker. He noted the physician-owners only get one chance to sell their center, so they shound ensure the sale targets the best strategic partner at the right price. The buyers have a wealth of experience having completed dozens or even hundreds of deals, so it really benefits the ASC to work with somebody who also has advised on many deals so they get the benefit of their experience.
3. Minority or majority interest: What best fits your ASC?
Mr. Walker sees ASCs selling both majority and minority interests as fewer centers choose to remain independent. But there are differences between these two types of deals. "Majority deals — that's where you'll get the biggest bang for your buck. You'll get typically a premium if you sell a majority ownership interest that allows the majority owner to effectively take board control," he said. "For the minority deals, those tend to be more strategic."
Mr. Vick recommends a minority interest sale for ASCs that are in the ramping up phase or that are having difficulties. In these cases, a smaller company will buy a minority interest in a center, help them to grow and become more profitable, and then have a second sale to a company that buys majority interest at a higher multiple and a higher value.
4. Choosing the best buyer
The buyer that pays the most is not always the best buyer, Mr. Searles noted.
"With a lot of the physicians we talk to, it's more about strategic fit. No one knows that surgery center better than the physicians and where they think it's going long term. No one knows that better and that's part of the initial phase of going to potential buyers, interviewing them, getting their view on the surgery center, the market the future and agreeing with what they're presenting," he said. "You're going to be partnering with them long term so you better be happy with who you pick."
What's most important, Mr. Walker said, is finding a cultural fit and "who's the best dance partner for you. I've been surprised at how many times that trumps the economics where people take a slightly worse deal economically to really choose the right partner. You really can't generalize. You can't. Whatever's right for you," he added.
Mr. Vick believes finding the best buyer is based on the sellers' goals and their local situation. There are basically three buyers — ASC management companies, hospitals and private equity firms. If the ASC owners want growth strategies and resources to help the center grow, an ASC management company is the best bet and they almost always offer a higher value than the hospitals will offer. However, if the ASC is looking for access to better payer contracts and referrals, the local hospital could be a better partner. If the ASC owners are seeking only a liquidity event, a private equity firm could be the best buyer.
"Often today we are recommending a combination of management company and hospital as joint buyers of a majority interest in the center because then the sellers get the best of both worlds: a management company that is profit-driven, has management expertise that can help your center grow, and. referrals and access to better contracts from the hospital partner," Mr. Vick said.
5. Finding the best time to seek a valuation
Mr. Walker explained it can be helpful to receive input from an accountant or valuation consultant so the ASC has a sense of valuation before deciding to go out into the market. That input may also help determine if the sale makes sense. Mr. Searles noted ASCs are not obligated to go through with a sale until closing documents are signed. Therefore, he, too, believes it is beneficial to receive input from a valuation consultant. He also noted potential buyers will tell ASCs what they like about the facility so the center internally can assess what to do better.
If the ASC is selling to a hospital, those hospital valuations tend to be lower than valuations from ASC management companies, according to Mr. Vick. And even if the ASC wants to sell to a hospital, it's still advisable to get competitive bids from other ASC management companies so the ASC has negotiating power. "We have found that the best way to determine the highest possible fair market value for your center is to get competitive offers from several ASC management companies, as well as the local hospital."