Jason L. Ruchaber, CFA, ASA, principal with HealthCare Appraisers, discusses three ways an ASC can increase its value when preparing for or considering a sale to a corporate or hospital partner.
1. Financial reporting. One of the most important things a center can do leading up to a sale is to get their financial house in order. An investment by a hospital or corporate buyers will involve financial due diligence to support the purchase price, and a well-organized, accurate financial package will typically translate into a higher comfort level with the entity's financial performance (and a higher purchase price). Generally, a buyer will want to review financial statements and operational reports for 3-5 years. In many instances there are inconsistencies in the financial statements from year to year due to changes in reporting software, accounting firms, practice administrator, etc. It is also common for centers to report on a cash-basis, which excludes certain balance sheet items such as accounts receivables, inventories, accounts payable, etc. When preparing for a sale, the center should have a CPA firm prepare accrual-based financial statements for the entity for 3-5 years, and for larger centers an audit of the most recent 1-2 years may be advisable. In addition to the standard financial statements, buyers will want to review certain key metrics and value drivers including but not limited to case volume by specialty, payor mix and physician utilization for owners and non-owners for the prior three years and for the interim period up to the valuation/transaction date.
2. Budget/forecast. In addition to a review of historical financial and operational performance, it is important to prepare a detailed 3-5 year forecast for your center. Though a review of historical financial information provides valuable insight to a buyer, valuation is ultimately the process of estimating the future economic returns that will be earned from the investment. It stands to reason, therefore, that entities that have gone through a thorough evaluation of their strengths, weaknesses, opportunities and threats — and put these into an actionable forecast for the business — will typically realize a higher value in a sale, as the projection may be perceived as less speculative a warrant a lower discount rate.
3. Payor contracts. During the historical financial review and preparation of the financial forecast, special attention should be paid to payor contracts. I routinely value centers that cannot tell me the last time they had a conversation with major payors about their contractual rates. In many cases, revenue is being left on the table that may readily be obtained. Getting paid more for the same case volume is a surefire way to increase the value of your center. On a related topic, centers with significant out-of-network revenue should evaluate the potential implication of going in-network with one or more of their payors. Though out-of-network reimbursement is significantly higher in most cases, the risk associated with sustaining this level of reimbursement is similarly very high. Risk and value are inversely related, and though the out-of-network benefit is not likely to go away immediately, an understanding of the revenue at risk from these payors can help to support a higher value. In some instances it may make sense to try to secure contracts with payors, and though this may result in lower revenue, it may also result in higher volume and value due to the risk/value relationship.
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