The biggest mistake that anesthesiologists make is that they wait until negative trends or catastrophic events occur in their groups before they decide to sell. In the article, Should I Sell My Anesthesia Practice, I demonstrated that timing is the most important factor when considering whether to sell your anesthesia practice. The first step is to calculate the current and future value of your group; otherwise, you will get the timing wrong and you will be underpaid by a strategic buyer.
Money is one motivating factor why anesthesiologists are selling their practices and Wall Street backed companies are buying these practices. It is not unheard of for partners to earn up $1-2 million each on a transaction and continue working for compensations that exceed the national averages. But the reason why buyers are interested in purchasing your group is because they can make considerably more money than you can while providing the same exact services. You need to know how much before you ever consider selling your group.
Here is an example:
Considering the example we used in our previous article:
Our Client’s Current Revenues |
Our Client’s Future Revenues with the AMC |
Increase |
|
Revenues |
$25,046,566 |
$48,089,407 |
$23,042,841 |
Units |
932,862 |
932,862 |
|
Percent Private Insurance |
59.6% |
59.6% |
|
Average Units Collected |
$25 |
$48 |
$23 per unit more per case |
Numbers were multiplied by a factor to comply with Non-Disclosure Agreement
Assuming that each partner earns $650,000 per year, the partners would agree to a future compensation and assign a profit he/she is willing to sell to the buyer. So, let’s assume in our example that the partners agree to a future compensation of $350,000. Thus $650,000 (current compensation) = $350,000 (future compensation) + $300,000 (profit). The buyer offers a purchasing price that is a multiple of 7 times the profit (EBITDA) and agrees to keep the partners employed for at least 5 years. Thus, the partners are offered $2.1 million cash each. Sound great, but not so fast.
In this example, Anesthesiastat calculated that the buyer’s existing third party payer contracts (Aetna, Cigna, Blue Cross Blue Shields, United Health Care, and Cigna) would double the group’s revenues. That’s right, the buyer was so much larger than the groups they were buying that they negotiated lucrative third party insurance contracts; we’ve seen rates 250% higher. If nothing changes with staffing, the increased contract rates would be in the form of profits for the buyer. Furthermore, in some cases the buyer improves staffing ratios, reduces the cost of benefits and billing expenses. Thus, profits grow even further.
Here is what would happen: The buyer purchase the group for 7x EBITDA. However, in terms of their lucrative insurance contracts, they could potentially afford up to 14x EBITDA. That’s just the beginning. Looking at current stock prices, many publicly traded anesthesia management companies are trading for as much as 40 times earnings. In essence, they buy the groups for 7x and sell it to the public for 40x. So, would a multiple of 7 be such a great deal if this was your group and you had multiple potential buyers?
Beyond money, groups have many reasons to sell. As we have discussed at length before, they may wish to reduce future management, billing and reimbursement risk. The cost of investments in updated billing, compliance and quality reporting software may be too big a burden for small groups. Many simply wish to offload the business side of anesthesia and focus on patient care.
At Anesthesiastat we are anesthesiologists first and consultants second. We want our colleagues to get the maximum possible sales price and compensation package in a transaction. So, we help you assess your value to the buyer, determine the right timing for a sale and work with you for the highest value possible in the transaction. Contact us today so we can provide you further details.