By Nap Gary, COO
“Life is like riding a bicycle. To keep your balance you must keep moving.” – Albert Einstein
“You can check out any time you like, but you can never leave.” – Felder/ Henley/ Frey
Investing in a surgery center is a commitment. It carries with it obligations as well as opportunities. For example, many surgery centers require that all investors agree not to invest in competing enterprises within the market area, and often make this covenant applicable for years after the investment ends. Even if there’s no such restriction, there are often provisions that make it difficult for individual investors to compel a surgery center to repurchase their interest or allow them to sell it to another investor. This means that, to a greater degree than with many investments, the owners of a surgery center are in it for the long term together, like it or not. So what do you do when the winds start blowing from a different direction and it’s time for a change? What exit strategies are available to the group as a whole?
You can always dissolve, but this article won’t dwell on that unpleasant alternative. Let’s assume you have value as a going concern, and realize that there’s too much to lose in simply closing shop. That leaves the other option: a sale.
The first thing to realize with a sale is that it’s likely to be only a partial exit strategy. Unless the buyer is a healthcare system that intends to employ all the surgeons, it isn’t likely to want physicians to divest of all their ownership in the surgery center. The more common scenario is one in which the buyer acquires roughly half your ownership. Different buyers have different advantages, disadvantages, structures and objectives. It’s important to understand each.
Centers that command the highest sale prices tend to be the ones that have strong, sustainable earnings. If your center is struggling, it may not be best to try to sell half your equity right away, because a valuation at a multiple of earnings isn’t likely to be very high. You may be better served selling a minority interest to a management company that specializes in turning around underperforming centers. After several years of improved results, you can then be in a position to sell half your interest to another management company or healthcare system that wishes to own a majority interest in the enterprise.
At that point, you need to decide which kind of buyer best suits your objectives. Healthcare systems, if they own a large enough percentage of the surgery center, can often negotiate much better reimbursement to the surgery center from non-governmental payers than the center could ever have negotiated on its own. The result can be doubly beneficial to physician investors — a significant liquidity event when they sell half their equity, followed by strong distributions (even at a lower ownership level) fueled in large part by higher reimbursement for cases. On the other hand, many surgeons invested in surgery centers in the first place in order to direct care in a manner that they believed superior to that of the hospital, so giving control to the hospital can be a difficult thing. We’ve found, however, that hospitals are often willing to allow physician owners to retain control of many administrative and clinical facets of surgery center operations these days. Still, it’s crucial to assess the hospital’s commitment to the model carefully before entering into the relationship.
The other buyer that has become more prominent lately is the large surgery center management company. There are a number of such companies with more than 50 surgery centers in their networks today. Many of them are currently owned by private equity firms that wish to take the company public in the not-so-distant future, and they’re often willing to pay healthy multiples of earnings to add good surgery centers to their portfolios. Many of them have sophisticated systems and analytical tools, significant institutional knowledge, leverage with suppliers and payers, and economies of scale. As with the healthcare system buyers, you need to make sure they’re going to be the right partner for you as you go forward. How do operating philosophies mesh? How much bureaucracy are you likely to encounter? How flexible will they be?
Finally, sometimes the best exit strategy is no exit at all. It’s amazing to see what a center can do when all the owners are committed to it, and management is constantly working to maintain high clinical standards, bring in new utilizers and procedures, improve payer contracts and cut expenses. So look around carefully before you close the door behind you.