Acquisition 101

We all hear stories of doctors selling their surgery centers or hospitals for millions of dollars. It seems like there is someone getting outrageous multiples and getting rich quick. While from time to time facilities strike the gold mine, more often facilities fall into a standard multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) purchase arrangement. To better understand what it takes to sell your facility and the language used in the transactions, I have prepared this brief course called Acquisition 101.

Let’s start with something unique to our industry called net revenue. In most other businesses, net revenue is the same as gross revenue or, to make it simple, gross revenue is what you bill for your services. Net revenue would be what you collect or expect to collect. In a grocery store, auto dealership or clothing store, the gross revenue and net revenue numbers are the same or very close. In healthcare we collect only a small percentage of our gross revenue (amount we bill) due to contractual allowances. It is not unusual for a surgery center or hospital to collect less than 20 percent of gross revenue.

The next thing to understand is your EBITDA. This is a term that takes your net income, net revenue minus expenses, and adds back allocations for interest, taxes, depreciation and amortization. This is the most important number to the person or company acquiring your facility. You need to be comfortable with these numbers in order to negotiate on a level playing field. Your offer will be calculated as a multiple of EBITDA and will range from four to eight times EBITDA. The difficult part for most companies is determining the period used for determining EBITDA. It is common to use the past year or trailing 12 months.

The multiple of EBITDA depends on several different factors as well as the current market conditions and company you are dealing with. Organizations looking to purchase surgery centers of hospitals are looking for opportunities where they can exercise fiscal constraints to improve efficiencies or develop new business line opportunities as well as their ability to re-syndicate to new physician partners. Having a license in a certificate of need (CON) state should also increase the value, as they present a barrier to entry. Some factors that drag down the multiple include declining case volume, partner investments in competing facilities, not having in-network contracts and operating problems. Everyone wants to join or own a winning team, and when you see cases per month going down, it raises red flags.

In order to be prepared to put your facility on the market, you should take a long look at your operations and be sure you have what it takes to demand a high multiple: strong supportive physicians who are loyal to the facility, well-run operations that meet or exceed certification standards, a growth profile for case volume and increasing EBITDA. Be prepared to have non-compete and buy/sell provisions in your operating agreement if they are not already in place.

Understand that the process of an acquisition is long and tedious. Be prepared for the deal to fall apart several times before the transaction is final.In the end, it will all be well worth the effort.

Michael J. Lipomi, MSHA, is president of RMC MedStone Capital. He can be reached at ssurgery@aol.com.