Valuation, operating agreements, non-competes and legal and process issues can all play a key role in determining whether an ASC is ready to be sold.
At the Becker's ASC Review 22nd Annual Meeting, two speakers — Michael Stroup, senior vice president of acquisitions for United Surgical Partners International, and Kevin McDonough, managing partner for VMG Health — discussed major topics involved in deciding whether to sell an ASC.
"When you look at buyers, you first have to distinguish between investment and strategic value and what a fair market value is," said Mr. McDonough. Mr. Stroup added that the difference is a common misconception, especially among physicians. While investment and strategic value focus on potential value, fair market value surveys the entire field of potential buyers and hones in on what an ASC's value is at the time.
This misunderstanding can often cause problems in the long-run and lead to unfulfilled expectations, including situations in which sellers believe an ASC is worth more than it actually is. However, it's important to remember how much the market has changed recently. "From an overall range, there's been a greater divergence of prices being paid out there," said Mr. McDonough. "By nature, this industry has evolved."
Mr. Stroup agreed. "It's a much more difficult operating environment than it was 10 years ago," he said. "Reimbursement is more difficult than it's ever been."
Mr. McDonough and Mr. Stroup also assessed in-network and out-of-network issues. "I don't like to buy out-of-network," said Mr. McDonough. "We're not going to buy an out-of-network with 50 percent exposure." But Mr. Stroup said the situation often depends on the particular out-of-network ASC. "All out-of-network is not created equal," Mr. Stroup said. "You have to look at overall reimbursement trends and see if the ASC has been stable."
Non-competes are also a major issue surrounding the selling of an ASC. The clauses are required in almost every type of sale deal. Although a few years ago non-competes typically lasted for seven years, the market has changed. A typical time length for non-competes is now five years. Anything less than that timeframe changes the game. "If someone said it's going to be a one to two year non-compete, that would absolutely impact value," said Mr. McDonough.
Once an ASC is fully assessed, how can one determine if the timing's right to sell? "Think about macro issues and your referral base," said Mr. Stroup. But he and Mr. McDonough stressed that the timing can never truly be perfect. "As the major players in the market begin to consolidate, I don't know that it's going to get more competitive," said Mr. Stroup. Mr. McDonough agreed: "If you hold on to your ASC a little longer, you may have a more aged workforce, but it really depends on your particular market."
If an ASC does decide it's the right time to sell, it should take numerous steps to prepare. When an ASC is on the market, Mr. McDonough said VMG Health will come in to conduct a site visit and observe financial factors. "If you can't produce consistent financial information, the perception would be it's not the most well-run facility," he said. If it's too challenging for an ASC to sort through finances, it should hire a third party to do so.
In addition, ASCs must show an incentive to grow. "If they've thought about things they can do to help growth, that's music to my ears," said Mr. Stroup.