1. People’s perceptions have changed over the last nine months. "It’s no big secret that, notwithstanding the obvious gyrations and challenges of the credit market, much of what has changed over the course of the last nine months, and will continue [to change] in 2009, are people’s perceptions," says Mr. Zoch. "Reality and perception are very often quite different, and for some, it is important to remember, perception is reality.
"Whenever there is uncertainty or anxiety — issues around capital gains treatment or credit markets for example — the perception of value changes," he says. "Look at GE — it has always been a stalwart global company, but now the value of GE is totally different from just a year ago. Companies that are looking at potential mergers and acquisition targets will value companies differently as they move forward. And the timelines [for closing a deal] are also changing. Sellers and buyers are being more cautious [and] taking longer to get deals done."
Mr. Zoch says that to make good decisions, ASC owners need to know what these changing perceptions are in order to understand and address them.
"There has always been a gulf between a seller’s sense of what ‘item A’ is worth and what a buyer thinks ‘item A’ is worth," he says. "Usually you can bridge that gulf. But these days the cautiousness of buyers has widened the disparity.
"Another thing to realize is that the way companies do valuations is changing," Mr. Zoch says. "I used to see trailing 12 months’ metrics being used, as a general rule. Now, you see trailing 12 months’ and an attempt at ‘looking forward’ as well. Potential buyers are asking themselves, ‘What are the chances that the current revenue, volume and profits will be maintained or will they be eroded? And by how much?’ It’s an additional level of caution that buyers are exercising." He says that it is wise and justified for them to be cautious.
2. It is as important as ever to know why you are considering selling. As ASCs face an uncertain future, Mr. Zoch has seen a tendency for some to make risk-adverse motivated decisions. He suggests healthcare leaders and physicians work to avoid falling into this trap by taking a step back and trying to consider the larger picture, and examining how the decisions they make now could affect their organization 5-10 years down the road.
"Know why you are considering selling — understanding your motivations will let you get focused and pick a better partner," he says. "Ask yourself, ‘What are my objectives? Cash? Operational expertise?’ If it is for a cash-out, ask yourself, ‘What will I use it for?’ Follow the logic all the way through. Is it for buying out retiring or non-productive physicians? To rebalance your investment portfolio? Do you have too much of your net worth in this one asset. Is it to pay off debt or expand?
"I think there is always going to be individuals who are motivated by a degree of fear, whether it is from uncertain economic times, new legislation, or not knowing if their business will remain viable," Mr. Zoch says. "This can lead some to want to hedge their bet and take some money off the table."
He is seeing physician partnerships with a higher tolerance for risk holding onto their organizations during the recession while individuals with less tolerance may be moving into the market to sell next year in greater numbers.
"The down side of that [tactic] is that most likely their performance has already been affected by this economic cycle, and so their value is lower than a year or two years ago and they’ll need to adjust their perceptions and realize that they are likely not worth as much and may not receive as much as they’d hoped.”
For this reason, it is important, to really understand why you are seeking a partner, Mr. Zoch says.
"Cash and expertise are the two most common motivations," he says. "This is well and good, but it’s important to know what you want to accomplish specifically so that you can select a good partner as opposed to a ‘personality’ or dollar amount. Try to assess what a potential partner can bring to you; try not to make a decision based on a representative’s personality, immediate need, internal political pressure or emotions. Try to remain objective."
3. There are opportunities in this cycle, as well as problems. Mr. Zoch urges ASC owners not to get lost in the anxiety that can result from the uncertainties of this cycle.
"You can get lost in the anxiety of ‘now,’ but you need to look at your long-term situation," he says. "Don’t freak-out because the stock market — I’m using the ‘stock market’ as a metaphor here … where individuals see their business solely as a stock or equity that is dropping, unless you need your money urgently. We will come out of this cycle; [the situation] will change. There will be opportunities in this cycle and problems as well. Again, it’s good to take the approach of stepping back and looking at the bigger picture. You don’t want to over-steer. It may feel like your last chance to sell, but chances are that’s probably not the case."
While this cycle will present challenges, operators of ASCs may not need to make significant changes as long as the facilities remain profitable and are run well, Mr. Zoch says. There may be a drop in volume and drains on your revenue, but "belt-tightening" may be a better option than immediately seeking out a corporate partner.
"Administrators, physicians, and many others, personally, are going through this right now," he says. "Everyone is asking, ‘Are we just throwing money out the door? What is a good use of our funds? Where can we make our operation more efficient?’ For individuals, the decision may be they don’t need three Starbucks a day and a new car. For your facility, it might be that you need to purchase equipment or supplies differently.
"The beauty of a cycle like this is that it encourages and rewards you for being more efficient and running your business more intelligently, and when things turn around you’re still running it better and you’ll make even more money when times get good, again," Mr. Zoch says. "Think of it as a tune up; a great opportunity. And if you don’t feel capable of doing that tune up, then considering a corporate partner may be for you. Regardless of the credit market, a well-run ASC can be a phenomenal investment. And corporate owners want to engage well-run ASCs in dialogues about possible joint ventures."
Mr. Zoch (gnz@kbic.com) is an equity partner with Kaye/Bassman International Corp., an executive search and recruitment firm which offers an array of services, including behavioral profiling, mergers & acquisition consulting and unbundled search services. His primary focus is the strategic growth and staffing initiatives of client companies, but he also leads the healthcare mergers and acquisitions group that assists clients in locating strategic corporate and physician partners for development or acquisition. Learn more about Kaye/Bassman.
