Merging Two ASCs: 1 + 1 = 4
02/15/2011
By Henry Bloom & Robert Goettling, The Bloom Organization
In certain areas of the United States, the “perfect storm” for ambulatory surgery center (“ASC”) mergers is brewing, or in some cases, has already taken its toll. This “perfect storm” is comprised of the declining reimbursement rates, market saturation, and a sluggish US economy.
Acknowledging that most of us realize the timing seems right to merge to ASCs, the next question naturally becomes: how valuable can a merger be?
Recently, The Bloom Organization consulted on the merger of two ASCs in South Florida. We started with two clients, each with approximately $1 Million in EBITDA and under 30% profit margins. As separate entities, these ASCs had a combined equity value of $6 Million. But by closing the doors to one center and bringing all the cases into the other, the two ASCs increased their value by $16 Million! Let see how….
First, the combined EBITDA of the ASCs increased from $2 Million to $4 Million through savings in overhead, increased operating efficiencies, and improved payer contracts.
Next, the multiple of EBITDA went from a 5 for the individual ASCs to 6.5 for the merged center, increasing the total equity value by $16 Million!
Like most potential ASC mergers, the value created on paper looks great. However, almost anyone can put numbers on paper and tell a great story. The real value created is in delivering the finished product. Countless business issues are encountered when seeing a merger through start to finish. The Bloom Organization advises our clients to consider the following steps in contemplating a merger:
- Building the pro forma– Building an accurate pro forma for a merged center is very difficult and very important. The pro forma allows all parties to make an informed decision, so it is imperative to have someone with experience in building similar models.
- Unbiased third party – Brining two independent surgery centers together raises questions on the true value of each to the transaction. A fair and unbiased third party should be retained to advise both centers in the merger.
- Identify Physician Leaders – In a merger, you are likely to be dealing with 20+ physician partners, all with their own opinion on how the deal should be structured. In order to manage the personalities and opinions of each of the doctors, there must be 3-5 physicians who can lead the group across the finish line.
- Agree on major issues at onset – There is a laundry list of things to consider when merging a center. Do not get to the point of signing documents without having discussed major issues or else the deal WILL fall apart. A few of the questions to ask are: What will the ownership structure be? Which staff members stay and go? What are the future plans for syndication or sale? Who will be handling anesthesia? What will be the payer contracting strategy? Who is willing to rearrange their surgery schedules? And many more.
- Experienced Attorneys – Believe it or not, attorneys can make or break deals. You need someone that has ASC experience all across the country. It is also important to have at attorney that can work at your pace without getting hung up on non-material issues that could bog down the deal.
A merger can be a great solution for many financially underperforming ASCs. As the “perfect storm” starts to loom over many ASCs, we expect more and more ASCs merging across the country.
Disclosure: In addition to providing consulting services for the merger, The Bloom Organization was an equity partner in one of the two merged ASCs.
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