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5 risks ASC owners face when they don't have a succession planMay 26, 2016

Gregory Seigel, JD, LLM, CEO of Seigel Advisory Services, discusses the risks associated with leaving retirement and succession planning to the last minute.

1. If you don't have a plan, you may not understand the value of your ASC. Surgeons often aren't prepared to sell their business or bring in new partners at a time when their ASC is at its highest value. It's a common mistake for surgeons to wait until a few years before retirement to sell or bring on new partners; by that time, their business is less valuable.

"In the lifecycle of a business, the most opportune time to sell is when the doctors are in their early 50's," says Mr. Seigel. "This is because physicians in their early 50's typically will work for an additional 10 to 15 years. The ASC is most valuable to potential buyers if the main physicians of the ASC are at least 10 years away from retirement. However, most surgeons don't want to sell that early."

Surgeons may be able to find a buyer that can arrange a structure that still gives the physicians control of daily operations and autonomy over the ASC and clinical practice.

2. There are risks to not adapting to the changing healthcare environment. The Affordable Care Act and CMS's constant budgetary restraints will continue to cut reimbursements for physicians each year. Yet, technology will continue to improve, which allows surgeons to bring higher acuity cases into the ASC. The surgeries performed in a hospital now may transition into the ASC five or 10 years down the road; make sure your center changes with the times.

"If you don't have a plan, can your business be prepared for the changes in healthcare that may impact the surgeries performed in your ASC? Will the procedures being performed in your ASC today have high enough reimbursement rates at both the facility fee and professional fee levels in the future?" says Mr. Seigel. "As technology improves, physicians should be prepared to address those changes."

3. Don't fail to adapt to changes in the business environment. ASCs generally are't making as much revenue as in the past due to reimbursement cuts and tight operating margins. The ASC's fixed costs — medical supplies and staffing costs — continue go up, particularly for salaries and employee benefits.

"If you don’t have a plan for the future, are you prepared for what happens when the business becomes less sustainable and expenses continue to increase?" says Mr. Seigel. "Usually the way to fix this problem is to essentially bring in more doctors while adding new procedure to the ASC. The question is whether your business is prepared to make those changes and if so, are the ASC owners ready to give up equity in their ASC to a management company, a hospital system, or to other physicians in their practice? Are they willing to make the necessary sacrifices to grow their business?"

4. Understand the value of your real estate to your overall business enterprise. Surgeons often purchase their real estate to help facilitate the operation of their ASC. Today, many investors are now looking at healthcare facilities as a long-term profitable investment. In many cases, the ASC real estate may be more valuable than the business itself.

"The question is whether physicians take advantage of this trend or run the risk of waiting to sell their ASC real estate. Most surgeons aren't cognizant of how valuable their real estate is and don't know what to do with it," says Mr. Seigel. "Today, we have historically low interest rates which allows for more investors to have a greater access to capital to purchase real estate. At the same time, the capitalization rates are historically low so investors aren’t expecting as high rate-of-returns on their investments as they previously had sought."

Physician owners must consider whether to let the building age and depreciate or to sell the real estate and lease it back from the buyer. "If you are the owner of healthcare real estate, you may never see an economic opportunity for real estate to be worth this much in the healthcare sector, especially for ASC’s," said Mr. Seigel. "Most institutional investors tend to own freestanding medical buildings larger than 30,000 sq. ft, but because it's such a competitive market for good deals, these larger companies are investing in smaller freestanding medical buildings, such as ASCs, when they historically haven’t invested in them."

5. If you don't have a plan for the future, you're setting yourself up for unrealistic expectations. "Physicians generally believe they can work longer than they actually do and the repetitive motions for performing surgery cause a lot of orthopedic problems that generally don't allow surgeons to work as long as their non-surgical colleagues," says Mr. Seigel. "Surgeons may find they have to retire earlier than their colleagues and that their business may not be ready for the transition."

Preparing a plan for the future strengthens the relationship between younger and older partners as well, especially if the senior partner must abruptly retire. Annual reviews can make sure every partner is on the same page. The reviews include:

• Legal review
• Accounting review
• HR review
• Insurance contracting review
• Compliance review

"There is more risk associated with inaction than constructively preparing for the future," says Mr. Seigel. "You are essentially causing more harm by doing nothing than by making decisions with the future in mind."

© ASC Communications 2016

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