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  • Surgery Center buy in

    Hi all,
    I am a early career surgical subspecialist physician being offered a buy in opportunity to a multispecialty ASC in the community. It would be 49% physician owned, with the option to buy 1% of the surgery center as a share. This 51% is owned by a regional hospital chain with a good track record (one or two other surgery centers in a similar partnership) as well as a good local reputation.

    I am a bit perplexed by the valuation of shares, but it seems like a reasonable price.

    1) Who do I have evaluate the deal? Our practice accountant? Tax lawyer? Real estate lawyer?
    2) Is the valuation generally based on EBITA?
    3) Based on projections it looks like they are projecting no dividends for next 12 months, but slowly rising over the next few years as debts are paid down / off on the new facility.
    4) What are the bottom line numbers that I need to look at when evaluating these deals?

    For my overall financial situation, I am a partner in the practice, no student debt (only mortgage), approaching a 7 figure net worth. Buy in cost would be around 5-10% of my current net worth, but could pay for it with my partnership bonus from the practice for the year.

    Thanks again in advance.

  • #2
    1. An accountant and a lawyer with knowledge of medical practice acquisitions. Your own accountant may not be as helpful.
    2. Generally yes, usually a multiple. Should also consider long term liabilities.
    3. Not ideal. Should make the valuation less and the risk of investing higher.
    4. Look at (or have someone else look at) the practice financials (balance sheet, P&L statement, statement of cash flows). Understand all of the revenue and expense lines. See what sort of long term debt/liabilities are on the books.

    #3 really would bother me unless it's just getting off the ground and the valuation is cheap. Or if they had a sizable investment that's getting paid off in a year. If it's been around a while and they're really not making money, I'd be very suspicious.

    Comment


    • #3
      Originally posted by jhwkr542 View Post
      #3 really would bother me unless it's just getting off the ground and the valuation is cheap. Or if they had a sizable investment that's getting paid off in a year. If it's been around a while and they're really not making money, I'd be very suspicious.
      +1
      How long has this ASC been operating?

      Comment


      • #4
        Originally posted by GasFIRE View Post

        +1
        How long has this ASC been operating?
        +2
        View any pro-forma with extreme skepticism

        Comment


        • #5
          This sounds like a new facility. You should be paying zero dollars for the projected income/distributions/EBITDA of a new facility. For a new facility, the build and equipment was presumably financed. Your buy-in at that point should be your share of the the down payment. You may be asked to also sign a personal guarantee for your portion of the loan as well, but ideally once the build is complete this would go away. For example, if the ASC cost $5M, the investors would put down $1M. If you own 5%, that would be a $50k investment for you obviously. The rest would be financed. You may have to guarantee the whole $250k of your 5% share of the venture fails. Hopefully not though, and if you do, make sure your liability is not joint and several.

          A new build that works out is great because the relatively low investment may, after a few years and debt is paid off, result in annual returns of 100% or much more. However something like 70% of new ASCs fail (I need a reference on that but it’s what I’ve heard). This is what makes the risk-benefit of a new ASC worthwhile. Relatively low investment, but high risk, high reward. You absolutely cannot invest in a new ASC based on projected returns. If someone is trying to sell that to you then they think you’re a sucker.

          If I misinterpreted your post, and this is an established a profitable ASC, then yes, your investment should be based on annual distributions, which is probably slightly different from but somewhat similar to EBITDA. Investment of anywhere from 2-5x annual returns is reasonable depending on the circumstances.

          Please give more details for a more specific response.

          Comment


          • #6
            Thanks so far! Sorry I was not perfectly clear in the first post because it is also a little confounding to me as I have started to review the paperwork.

            Basically, this facility was a previously poorly performing ASC that was purchased by ‘regional local hospital’ with good reputation and has been in operation for around 2 years under regional local hospital name. They have excellent patient care and have been excellent working with me and purchasing and establishing a product line.

            This regional hospital has already established ASC in another location that does well per investors in that facility, so they know what they are doing as far as ASC goes.

            Basically, I am hoping that valuation is low enough that I am buying into the ground floor of a rehabbing effort that will hopefully turn out quite nicely for me. But I’m wondering how I determine if the valuation is low enough that it’s worth the risk.

            I hope that is more helpful.

            thanks

            Comment


            • #7
              agree with the above. The valuation of a business that isn't making any money is usually quite low. Asking 50k-100k for 1% seems dubious. Maybe that's the price of doing business as a 49% shareholder with a hospital.

              If the center is starting from scratch, you would hope for a distribution within the first 4-6 months (at least that's how ours was). Having to wait a full year is a long time. If you are buying an existing center, it should be making you money from the first month. Otherwise, huge red flag.

              with regards to this center being successful. Ultimately it is the physicians that will make a center successful. The management is important, but really you need committed surgeons that are going to bring good patients and good cases. Without that revenue, it cannot be successful. So, is this place bringing in new doctors to operate? Or are they working with the same ones from the failed center?

              Comment


              • #8
                Originally posted by HandFellow View Post
                agree with the above. The valuation of a business that isn't making any money is usually quite low. Asking 50k-100k for 1% seems dubious. Maybe that's the price of doing business as a 49% shareholder with a hospital.

                If the center is starting from scratch, you would hope for a distribution within the first 4-6 months (at least that's how ours was). Having to wait a full year is a long time. If you are buying an existing center, it should be making you money from the first month. Otherwise, huge red flag.

                with regards to this center being successful. Ultimately it is the physicians that will make a center successful. The management is important, but really you need committed surgeons that are going to bring good patients and good cases. Without that revenue, it cannot be successful. So, is this place bringing in new doctors to operate? Or are they working with the same ones from the failed center?

                About Half of the physicians from the failed center have been asked to go elsewhere. They are consistently looking at adding more physicians. Block times have been significantly more utilized than with the failed center.

                I can tell you based on the surgical side of things that this facility is better than the other ASC I operate as well as the hospital that I operate at. More receptive admin, willing to partner and listen to ideas, etc.

                Comment


                • #9
                  Also to note, contracts with insurance carriers were poor with the old facility and this has increased for 2022 fee schedule as they have been able to renegotiate rates.

                  again, I guess the question comes down to, how much of valuation is in numbers and how much of it is in the pipe dream of future income / ‘goodwill’ on an ASC buy in

                  Comment


                  • #10
                    You should be paying for zero goodwill.

                    You should be paying for a multiple of EBITDA or distributions, 2-5x as I said above. If that’s zero or negative or whatever, ie it’s not profitable yet, then perhaps they are simply asking for you to cover your percentage of the debt/expense they have covered. I would have a good accountant look at the numbers.

                    The fact that they have another successful ASC means very little. There could be 8 orthopaedic surgeons and 4 ENTs and 6 urologists there who are all busy and efficient. If your new ASC doesn’t have the surgeons to do the same, the hospital’s management is less important.

                    What are the numbers? Your post implies nearly 100k… for what % ownership? How are they justifying that value?

                    Comment


                    • #11
                      When I was invested in a syndicated hospital there would be occasional quarters where there was no dividend check. This was usually associated with some huge expense. When the hospital was sold I got a nice capital gain.

                      Comment


                      • #12
                        Originally posted by abds View Post
                        You should be paying for zero goodwill.

                        What are the numbers? Your post implies nearly 100k… for what % ownership? How are they justifying that value?
                        Closer to 50k than 100k for buy in at 1% of company.
                        ebita zero this year but goes from 1 to 2.5 over next 5 years.
                        cash flow neutral first year but projected 500k thereafter.

                        trying to use round numbers as much as possible.

                        Comment


                        • #13
                          Originally posted by centrebaseball View Post

                          Closer to 50k than 100k for buy in at 1% of company.
                          ebita zero this year but goes from 1 to 2.5 over next 5 years.
                          cash flow neutral first year but projected 500k thereafter.

                          trying to use round numbers as much as possible.
                          In simplistic terms they’re trying to value this ASC at $5+ Million. Without a profit. Maybe that’s what they paid to bail out the previous owners, which sounds like a great deal for the previous owners but not for you.

                          By “cash flow” do you mean the pro forma projects $500k of income/distributions?

                          Is that per month? Per quarter? Per year? If it’s annual, not only is that a shockingly poor income for an ASC, but they’re asking you to invest at 10x annual return. And that’s projected return; we all know pro formas are often optimistic. Please correct me if I’m mistaken on any of the details but this sounds horrible.

                          Comment


                          • #14
                            Abds, you are not too far off, which is why I came here in the first place. I will have our practice accountant look at these numbers, and also ask some questions, because I was a little surprised at the cash flow projections just based on some personal discussions with friends in other cities who have invested in ASC. Thanks a bunch.

                            Comment


                            • #15
                              500k per year is very low. Asc I go to distributes that monthly. What I would recommend is find a local bank that does physician business loans. Tell them you want to take out a loan for an ASC buy in. They will ask for the financials and review for you. I took out a loan for the ASC buy in above and then just paid it off in 1 year or so. Even if you end up not using the loan they will also review the financials of the place. If it’s terrible then they will tell you.

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