Healthcare transactions increased in the last year, with physician medical group deals jumping 119 percent year over year, according to a PwC report. The COVID-19 pandemic stressed many smaller physician-owned practices, and costs to run ASC businesses aren’t likely to drop any time soon.
Many physicians are looking to merge with other independent physician groups, sell to a private equity firm or to a local hospital as a result.
Physician-owned practices and surgery centers are attractive targets to buyers in the healthcare space because they are high-quality, low-cost sites of care, which is perfect for the emerging value-based care landscape. ASCs are also primed for growth as more complex procedures head into the outpatient setting and thus are increasing in value.
Here, Jim Freund, managing partner at ASCs Inc., discusses the paradigm shift in healthcare to the outpatient setting and what potential sellers need to know before signing on the dotted line.
Question: What are you seeing in the ASC and practice markets and how is that going to impact mergers and acquisitions in the space?
Jim Freund: We have seen a significant shift away from hospital-based procedures to outpatient settings. The drivers have been CMS continuing to approve higher-acuity procedures that can be performed in surgery centers and payers taking a more active role in directing patients to these high-quality, lower-cost-of-care settings. COVID has certainly acted as an accelerant because physicians who were forced to move their cases to freestanding facilities now understand there are many advantages to working in this environment and patients today are much more aware of the many benefits of having their cases performed in surgery centers.
This migration of cases to outpatient care has created a strong demand for independent physicians and their practices and surgery centers, in particular those associated with the most sought-after specialties, including pain, spine, orthopedics, cardiology, urology and GI. There are groups focused on acquiring interests in every specialty and type of facility and there has been a tremendous influx of capital from public and private markets driving demand and spurring competition. The buyer appetite for practices and surgery centers is thus stronger than ever, creating more opportunities than ever before for physicians to leverage their current situation.
Q: Why would a practice or ASC owner sell an interest in their business?
JF: The reasons that we hear most often are senior partners wanting to diversify or transition their investment and take some money off the table, the desire to offload the responsibilities and challenges that come from managing these increasingly complex businesses, the difficulty in competing with larger organizations, and getting help with recruitment, contracting, cost containment and more.
For any owner, you should consider what a prospective partner could bring to your organization and if it makes sense to create a strategic alliance. The benefits can include some or all of the following: enhanced referral networks, recruitment and physician and staff retention, improved payer contracts, supply purchasing power, operational infrastructure, advanced technology, revenue cycle, finance, data analysis and accounting services, and human resources, all of which can be of real value to independent groups.
For senior members, there comes a time when they need to transition ownership and responsibilities. This creates an opportunity for founding partners to realize a significant liquidity event and get rewarded for the years they have spent building their ASC business and at the same time provides junior partners with an opportunity to be part of an organization that will grow and provide them with a pathway to further success.
Q: Who are buyers and what are they looking for?
JF: Buyers today include hospitals and hospital systems that are actively looking to expand their outpatient footprints, national firms that continue to grow through acquisition and development and have extensive industry expertise, private equity-backed firms that are focused on acquiring and rolling up practices and surgery centers, and other investors entering the market along with joint venture partnerships between multiple parties.
Buyers are looking for practices and surgery centers that can enhance their organization financially and functionally. They are seeking practices and ASCs in desirable geographic locations, that have a desirable mix of physicians, specialties and payers along with a strong staff and infrastructure with the right physical facilities. In addition, they will want to clearly understand how they can impact the center from a financial and nonfinancial perspective, ensuring that real synergies exist between buyer and seller, and clearly understand how this transaction will positively impact the buyer’s organization.
Q: What are some keys to a successful strategic transaction?
JF: For owners this is likely a once-in-a-career event, which puts you at a distinct disadvantage when dealing with sophisticated and experienced buyers, so it is important to not only be very involved in the process but to do certain things to realize the best possible outcome, such as:
- Gain the attention of the most qualified buyers and best possible strategic partners by creating a comprehensive confidential information memorandum that provides all the relevant and critical details of your practice and/or ASC, including growth prospects.
- Build a secure data room with all the detailed information that a prospective buyer will need to review in the format that will enable them to evaluate your organization.
- Set expectations early on with prospective buyers regarding your process and the timing, along with expectations and delivery dates, so you can keep this process on track.
- Understand that a strategic transaction is a complex and time-consuming process that can stretch to a year or more.
- Each buyer will have their own specific goals, and it is important to make sure that their goals are in alignment with yours, and that they have the resources, expertise and track record to achieve the representations that they make to you.
- Achieve the best possible outcome by engaging in a competitive process with multiple qualified buyers. These include management companies, hospitals, private equity firms and other investors. There needs to be real competition to realize the optimum financial and nonfinancial outcomes with the most compatible strategic partner.
- Engage an experienced healthcare attorney to review all the transaction documents.
- If the physicians also own the real estate, ensure that the rent is fair market value and that the lease contains terms that facilitate the sale of both the business and the real estate to ensure you realize maximum value for all your assets.
Again, these are just some of the many items to consider when undertaking a strategic transaction.
Q: What are the biggest challenges or changes you have seen in the strategic transaction process?
JF: I would say the biggest challenge is the sheer complexity and time-consuming nature of the sales process. There are really two distinct stages of every transaction: the first stage involves all the steps that lead to your group accepting an offer, and the second stage, which begins once an LOI is signed and ideally ends with your group closing the deal.
The previous question regarding what goes into a successful transaction is really stage one, which ideally ends with your group accepting an offer with an exceptional partner. Next comes stage two, in which the prospective buyer will engage a third-party to do detailed due diligence regarding all aspects of your organization, and your legal counsel who will begin to review the agreements. The diligence work essentially involves providing all information regarding your organization including facility information, corporate and owners’ legal documents, service contracts, leases and debts, ownership, licenses and permits, financial statements, revenue reports and statistics, payer, benefits and HR related items, insurance, taxes, chart reviews including patient and revenue analysis, anesthesia review and much more.
This is why having a very well-defined process and strictly adhering to it, providing information in a clear and concise manner, being actively engaged throughout the entire process, and ensuring you are in agreement with the valuation are essential to ensuring your transaction closes to your satisfaction at the end of this process. The due diligence phase is very intensive and typically takes 60 to 90 days to complete.
Lastly, having qualified legal representation that understands the complexities of your particular type of transaction and has the ability to effectively manage this to a successful close is critical.
Q: What can owners expect to get paid for the practice and/or ASC?
JF: When talking to owners, we always discuss this, and the truth is that the market will determine the price. When we engage with a new client, we may have a preliminary idea, but until you run a competitive process, you simply won’t know. For example, a buyer will consider the location of the organization, how desirable it is from a strategic and market perspective, they will evaluate the physician owners, their ages, their specialties, their case volumes, their staff, how many ORs they have, the practice platform and size and growth opportunities, capacity, revenues and EBIDTA, infrastructure, and a myriad of other factors. A buyer will want to understand how they can impact all aspects of the business and will then apply a multiple based on this to their valuation. Most transactions ultimately end up in the 7X to 10X multiple range for majority interest sales and typically 4X to 7X multiples for minority interest sales, but there are outliers on either side of these multiples.
Q: Final thoughts or advice you would give to owners considering a transaction?
JF: Make sure all the partners are on the same page and clearly define your goals, put together a detailed marketing package that provides prospective buyers with all the information they will need to evaluate your business. Solicit as many qualified buyers as possible, create a competitive process and get to know every prospective partner you are interested in. At the end of this, it is important to understand that unless you find the right partner, there is no obligation to move forward with a transaction. And remember, this is an extremely time-consuming and complex process, so you should absolutely consider having someone help you manage this.