Ambulatory surgery centers are currently actively traded in the marketplace. Given this high level of activity, it is essential for ASC leaders considering a sale or an assessment of where their center stands in the market to accurately determine their center's value. "Our deal flow in the fourth quarter of 2013 and in January leads me to believe it will be a robust year for ASC acquisitions," says Kyle Tormoehlen, a manager with HealthCare Appraisers. In this article, he offers insight regarding the acquisitions market this year and details key trends influencing ASC valuation in 2014.
Potential ASC buyers typically seek:
• A turnaround situation. Some buyers, often management and development companies, seek ASCs that are struggling. These buyers will use their operational expertise to improve the business and seek future growth.
• An established, successful business. Other buyers, including management and development companies and hospital-health systems, seek an ASC with a history of stable earnings. "These buyers bank on consistency of operations and view the ASC investment as a mature profit stream," says Mr. Tormoehlen.
Factors influencing valuation
Internal factors
The valuation process ultimately takes into account an ASC's historical financial trends, market specific factors, and future opportunities to assess the business’s future earning capacity. An ASC appraisal will include an in-depth analysis of everything from financial statements, the local economy and overall operational trends such as payer mix and physician production. "We take everything that we learn about the business and we project what type of return an investor can anticipate on a forward looking basis," says Mr. Tormoehlen.
ASC administrators and leaders can prepare for a business appraisal by keeping clear, organized financial records and key operational reports. In addition to having orderly historical data, ASC leaders can offer their own ideas for the center's future growth. "Be able to speak of future opportunities for your business," says Mr. Tormoehlen. "If you can't answer those questions, it becomes more difficult to fully measure your center’s worth." Future initiatives that could impact valuation include:
• Plans to recruit new physicians
• Efforts to add a new service line, such as spine or bariatrics
• Expansion of patient offerings, such as 23-hour stays
"Understanding your center’s strengths and weaknesses as well as having an organizational strategy designed to capitalize on opportunities or overcome challenges, speaks to the overall financial health of the business," he says.
External factors
Market factors can also play a large role in the value of an ASC. In 2014, key external factors include:
• Payer market. The Medicare Payment Advisory Commission recently recommended that ASC reimbursement remain flat in 2015. While Medicare reimbursement for ASCs is likely to remain flat, commercial reimbursement varies from market to market. Additionally, payers which hold a high concentration of the local insurance market face less pressure to negotiate favorable reimbursement rates. "It is often difficult for a single center to influence commercial payer rates without a hospital, health system or management company partner," says Mr. Tormoehlen.
• Joint venture partner. A larger partner can serve to increase an ASC's value. The support a hospital or management company brings to the table can serve to improve the potential for better reimbursement and / or lower certain operational expenses such as supplies. As profit grows, whether through higher revenue or lower expenses, a center’s value will also increase.
• Aging physician base. The physician pool is aging. Many independent physicians are nearing retirement while many younger physicians are being swept up in the waves of hospital employment. Value will be adversely affected in ASCs with no plan in place for bringing in new physician investors or cases.
The benefit of regular valuation
Forty-one percent of ASC management and development companies seek an independent opinion when determining FMV buy-out transaction prices, according to HealthCare Appraisers ASC Survey 2013. An annual valuation is often required in surgery center operating agreements, with good reason. ASC leaders frequently find themselves asking questions such as these:
• When is a good time to bring in new investment?
• Should an ASC partner with a management company or hospital?
• When does an exit strategy make sense?
"To do any of this, you need to know fair market value," says Mr. Tormoehlen. Timing is everything, and without a firm grasp of a center's value, ASC leaders may miss opportunities to maximize their center's worth and secure a stable future. "Despite all the challenges facing ASCs in 2014, our ASC Valuation Survey indicates that multiples are as strong as they have been in five years," he says.
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