What's it really worth? That's the question that ASC owners and operators commonly ask. While some ASCs may have valuation formulas set forth within their governing documents (e.g. a 3.5 times EBITDA multiple time trailing 12 month ("TTM") EBITDA in connection with a physician buy out), these formulas may not always produce a representative value for your ASC. Some primary reasons for this include the following:
1. TTM EBITDA may not be representative of go-forward EBITDA. Consider a scenario in which as of the date of "valuation" you have knowledge that you are losing two key producers. Reliance on TTM EBITDA would overstate value. Similarly TTM EBITDA may contain certain other atypical expenses, which are not expected going forward (e.g. excessive legal fees associated with a shareholder dispute).
2. Multiples in the marketplace may have changed since the documents were drafted.
3. Expected growth trajectory may not lend itself to the use of a multiple. Assume you have a fairly new center, and center is expected to grow by 35 percent in the next 12 months, 20 percent the year after, and 15 percent the year after before settling into a more long-term sustainable growth rate. Use of a multiple on a TTM earnings stream will understate value.
4. Center is fairly new and/or center is expected to be marginally profitable or unprofitable. Use of a multiple may not be representative of FMV as it may overstate or understate value.
If these conditions are present, it is likely appropriate to request a valuation to be performed by a qualified appraiser with specific experience in healthcare and ASCs. In preparation for this process you can expect the following:
1. To execute a letter of engagement which outlines the scope of the project, timing and fees.
2. To receive a comprehensive data request which will need to be completed and provided to the valuator, as further described below.
3. To host an on-site diligence meeting aimed at allowing the valuator to ask questions arising from a review of the data provided and designed to allow the valuator to develop an understanding of the strengths, weaknesses, opportunities and threats facing the center. Meetings can generally be handled in a single (half) day, and the valuator typically will want to tour the facility and meet with the administrator and key physician business and clinical leaders.
4. To the extent you have not provided one, to review the projection developed by the valuator for the center, as further discussed below.
5. Prior to finalization of the appraisal, to receive a substantially complete draft of the appraisal for factual review.
6. Assuming data is timely provided, you can expect the entire process to last anywhere from four to six weeks, on average.
As set forth above, you will need to respond to and complete a comprehensive data request. Typical items which will be requested include but are not limited to the following:
1. Purpose of the valuation – Typical reasons include physician buy-in our buy-out, sale of all or some of center to a third party manager of hospital
2. Size of the interest to be valued (i.e., this will have implications on discounts to be applied — or not — to the interest)
3. History and description of center
4. Governing documents (e.g. Operating Agreement)
5. Detailed financial statements (i.e., income statements and balance sheets) for the past three to five years
6. Detailed operational data including but not limited to case mix, payer mix and case volume, charges and collections by physician for the past three to five years.
7. Detailed fixed asset listing (more appropriate for centers which are unprofitable or marginally profitable)
8. Copies of important contractual agreements including real estate lease, loans/notes, and primary service agreements (e.g. management and billing agreements)
9. Detailed staffing roster to include names, positions, start dates, FTE status and rates of pay
10. Detailed five-year projection which should ideally include case volume by specialty, reimbursement by case, revenue, expenses and capital expenditures. To the extent that you are unable to complete this, the valuator can create the model with significant input from the center.
Valuation is a forward looking exercise. In other words, while the valuator will seek to review historical data, the valuator is doing so in attempt to predict the future cash flows of the center. These cash flows will be coupled with an assessment of risk which embodies the valuator's expectations as to the likelihood that the projected cash flows will actually be achieved.
While the valuation process may seem foreign and, at times, daunting, most ASCs benefit from the process as much as learning the answer to the question "What's it really worth?" In other words, having a valuation expert study the financial and operational details of the center and relay his or her observations can provide valuable insight to ASC owners and operators. Depending upon the level of sophistication of the ASC's systems and management, trends and issues are identified and often explained and data may be examined in new and helpful ways which may cause positive changes at the ASC on a go-forward basis.