Written by Laura Dyrda / Beckers Healthcare Review / February 19, 2018
If you are an ASC owner and have not already sold a majority interest in your ASC, we believe that no matter where you are in the lifecycle of your ASC or affiliated practice, that the following would be of interest to you.
Merritt Healthcare Advisors Executive Vice President Jim Freund discusses seven key questions selling an ASC.
Q: Is now the right time to sell my ASC and affiliated practices?
Jim Freund: There are many factors that go into this decision, including personal goals, succession planning, market dynamics, the trajectory of your business, regulatory changes, potential partners, financial and non-financial impact of sales, and much more. Every organization should take the time to look at these factors to determine the best time to seek a partner/sell. No matter what your decision, going through an evaluation of your business will give you an unprecedented insight into your business.
Q: What goes into a successful sales process?
JF: First step is to take a detailed look at every aspect of your business, understand your strengths and weaknesses, and come up with a strategic plan. This means that you need to use the appropriate analytics and metrics when analyzing the organization including the clinical, operational and financial components. You then would create a compelling marketing strategy and documentation that favorably, and accurately, represents your organization. Third, your business would be presented to prospective buyers. Following receipt of initial offers you would interview, evaluate and negotiate with each prospective buyers. The final step is to the creation of definitive documentation and Buyer due diligence stage preceding close. In this phase the negotiations continue and the Buyer will scrutinize every aspect of your business. There area myriad of details that go into managing this process successfully and without having previously completed this process, you simply will not know what details are needed or how to best position your business.
Q: With that said, can we sell our own center?
JF: Yes, and physicians very often do sell their own businesses. However, given that this may be the biggest single financial transaction of your professional career and that you will likely only do this once, you need to decide if you really want to take that risk. It is not possible to understand the deal landscape, and how far each Buyer can be pushed, without the experience of managing many deals.
Q: If I select an advisor, what should I expect?
JF: Selling a business is a time consuming and complex process, often taking over a year from start to finish. You should want to work with someone who is aligned with your goals and interests and is a partner with you through the entire process. They should have a background in investment banking and be a licensed broker; ideally they would have an in-depth understanding of the surgery center business and have successfully managed similar transactions. Lastly, an advisor should earn their fee many times over, both in negotiating the best holistic financial and non-financial terms for you.
Q: How do Buyers value ASCs?
JF: Many Sellers believe they will get paid a certain set multiple of trailing 12 months (“TTM”) EBIDTA. This is simply not the case. Multiples are only a proxy benchmark used to measure value and vary depending on the earnings denominator. The value of an ASC is a function of the sustainability of earnings and growth potential of the business. Each Buyer creates a projection of your business, based upon the information you present to them. They then discount the cash flow back at their cost of capital to determine value. Without understanding all aspects of the valuation process you place yourself at a great disadvantage. Being able to validate the business, articulate potential drivers of growth, and highlighting key factors that Buyers value is an integral part of the sales process.
Q: Why are the non-financial terms of a deal important?
JF: Once a deal is complete the physicians have to coexist with their new partners. This makes the non-financial terms equally important, if not more important, than the financial terms. These non-financial terms will drive the success of the partnership moving forward and need to be a part of the evaluation and selection process. For example: How is the board structured? Who controls clinical decision making? Are the owners able to trust the day to day operational and business responsibilities to the new partner? Will your business be able to get better contracts and improved pricing on supplies? Is there someone to handle clinical, compliance, and regulatory issues? Can the new partner ensure appropriate governance is in place or recruit new physicians and grow your practice? These are just a few of the many considerations that go into both evaluating and selecting the right partner. Ultimately you want to build, with your new partner, an environment that will enable your business to flourish as you move into the next phase of your career.
Q: What is the risk in going through this process?
JF: As a physician owner you are truly mitigating your risk by working with an advisor. At the end of the process you will not have to ask yourself if you got the best price or the best terms or selected the right partner, you will know for sure. The right advisor will use a systematic and disciplined approach throughout the process to ensure that the hundreds of individual items that need to be considered are addressed. An advisor will ideally use their experience to do a detailed analysis of every aspect of your organization and create a corrective plan and then forecast your business. An advisor will use all this information to create a confidential information memorandum (often up to 100 pages long) that is used to present you organization to a large buyer’s pool and create a competitive bidding process. An advisor will then manage all the interactions and meetings and negotiations with prospective partners to ensure that you are getting the best possible financial and non-financial terms. At the end of the day, this is really the only way to ensure you end up with the desired outcome. And as a caveat, you are under no obligation to consummate a deal if you feel the deal is the right one for you and since advisors work on success fees, there is no cost to you either.
About Merritt Healthcare Advisors
Merritt brings a unique skill set to the sales process that helps our clients realize maximum value for their assets and ensures that their long-term objectives are met. As the only M&A firm* that owns and operates a network of surgery centers, we have an in depth ‘operators’ understanding of the ASC business, and physician/medical practices. We utilize our expertise in analyzing operational, clinical, and financial aspects of our client’s business, identifying deficiencies, and applying corrective measures to maximize value. At the same time, we put together a detailed Confidential Information Memorandum (“CIM”) that is used as the basis for presenting your business in the optimal light. We then market the opportunity to the most qualified, likely buyers and use our experience as advisors to help negotiate the best holistic deal.
We welcome the opportunity to learn more about your organization, discuss our services, and to potentially be of service to you and your partners. It is never too early to have a discussion about how to best position your organization for a future sale.
*Principals of Merritt Healthcare (“Merritt”) acted in their capacity as registered representatives of Burch & Company, Inc. “(BCI”), member FINRA. Merritt principals are licensed investment banking agents of BCI. All services requiring a securities license are performed through BCI. BCI & Merritt are unaffiliated entities.