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What’s new in ASC strategic partnerships in 2018?

March 27, 2018

Written by Jon Vick, Founder and Managing Partner of ASCs Inc.

What’s new in ASC strategic partnerships in 2018?

Why do some centers command values well above other similar centers?  How can you realize maximize value for your center?

Demand for centers has increased.

ASC management company and local hospital interest in investing in all types of surgery centers continues to be very high, with multiple buyers competing to buy centers.  After over 30 years of management companies investing in ASCs and making significant profits by helping the centers grow and become more profitable, local hospitals and private equity firms are showing a heightened interest in participating in physician-driven ASCs as these continue to be the high-quality, low-cost providers. Currently there are over 50 potential buyers seeking to invest in a shrinking supply of desirable (i.e. two or more operating rooms, Medicare certified, etc.) centers. What is new is that there is more demand for ASCs, more competition to acquire centers, and multiples that are the highest we have ever seen.   Multiples for majority interests have risen to an average of 7-8 times EBITDA, and in some cases even higher.

Who is the best strategic partner for an ASC seeking to sell an interest? 

The best strategic partner for any given center is a partner that can help the physician-owners realize their financial and non-financial goals.  These typically include helping the center increase profitability and distributions while maintaining the highest quality and efficiency.

The leading ASC management companies can bring strategies that directly impact the bottom line.  Depending on the center’s location, contracting situation, and maturity, it is common to see a “lift” in contract reimbursements and substantial savings in supply costs, plus net revenue growth.  Cumulatively these can contribute to a very significant increase in profits and distributions.

A hospital partner can also bring advantageous benefits including access to better paying contracts, referrals of cases, supply contracts, and market strategies, such as managed care plans, that can be beneficial to an ASC.  However, hospitals usually use a valuation method that results in a lower value for an ASC and there is often an element of mistrust in the impact a hospital will have on how a center is operated and managed.

How have an ASC’s options for a partner changed?

The most interesting option available today is a three-way partnership between physicians, a hospital and an ASC management company. Previously hospitals wanted complete control so they built their own centers and competed with physician-owned centers.  Now hospitals need a low-cost, high quality provider to complete their managed care marketing strategy and physician-driven ASCs have proven to be the low cost, high quality provider. In a three-way deal the physicians get the best of both worlds: a hospital partner with better paying contracts and a management company oriented towards quality, efficiency and profitability.

How do ASC owners get the highest price and best partner?

In most cases the physician-owners will be selling their first ASC, and they will be dealing with buyers who have completed dozens or hundreds of transactions and whose goal is to buy at the lowest competitive price possible.  Here are 5 key steps to getting the highest price and best partner:

• Engage a consultant with significant ASC transactional experience who knows how hospitals and ASC companies assess value and who has a track record of increasing ASC values.

• Prepare a compelling information package that highlights the history of the center and quantifies future opportunities (contracts, supplies, cases, specialties, new partners, etc.) that will increase profitability.

• Solicit competitive partnership proposals from the leading local hospital(s) and leading ASC management companies, and use the proposals to maximize the value with the most desirable partner(s).

• Select the strategic partner that has the best track record in achieving their physician-partners’ long-term goals.  In a 3-way transaction, first select the best ASC management company and let the management company bring the hospital on board as a minority partner.

• Enjoy the future with a strategic partner that shares your values and interests in having a high quality, efficient and profitable ASC.

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