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4 Factors Affecting ASC Valuation and Sales

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Surgery center owners looking to sell should be aware of several factors influencing valuation and profitability.

Colin McDermott, CFA, CPA, is a senior manager with VMG Health in Dallas. He specializes in providing financial, valuation and transaction advisory services to healthcare clients, including ambulatory surgery centers and hospital systems.

Here are Mr. McDermott's four main factors affecting ASC valuation and sales.

1. Loyal and diverse physician base. One of the most important factors — and potentially the biggest risk — to a surgery center valuation is the physician base. An ASC with a sizeable number of physicians equally sharing the case load will have less risk than an ASC with only one or two key physicians, Mr. McDermott says.

If your ASC has a handful of physicians performing most of the cases, encourage those physicians to motivate their colleagues to increase the work load and better diversify the number of physicians using the facility.

"Really get your physician base to work together as a cohesive unit," he says.

When all physicians are on the same page and understand the importance of being loyal to their center, then the center's valuation will increase through the physicians bringing more cases to their center. The physician loyalty will bring about stronger operating metrics due to higher case volume, which is a crucial indicator of a center’s monetary value.

2. Physician recruitment. ASCs must be constantly recruiting new physicians to keep the center's physician base fresh and enthusiastic in supporting their center.

"You get physicians approaching retirement, and their case volume slows down," Mr. McDermott says. "It's a volume game. If volume goes down, but you haven't recruited new physicians, then the ASC’s performance may start to slide."

New physician recruitment can decrease the future risk to a center and increase its value, but it becomes more difficult to do as many surgeons are already aligned with a competing center and these competing centers are trying to recruit from the same limited pool of available physicians.

"With the current ASC industry, there is a strong demand for these free-agent physicians," he says. "Hospitals are also seeking to employ physicians, which can limit [physicians'] ability to take ownership in an ASC, which further decreases this pool of available physicians."

Despite the increased competition, it's necessary for ASCs to be mindful of the age and activity level of their physicians so to keep their center attractive to future investors.

3. Expense management. After physician diversity and volume, potential buyers will be cognizant of an ASC's expense management. Even centers with a diverse group of physicians and cases may have mismanaged expenses or overspending.

"Always be thinking about what you can do to control expenses and the bottom line," Mr. McDermott says.

Staffing efficiencies and cost-effective supply management drive stronger values for ASCs, he says. Financially struggling centers should look to cut costs wherever possible. For instance, an ASC with a strong orthopedic focus could work with its distributor to access a single implant manufacturer and leverage this volume to achieve cost savings.

4. Market strength. The ASC market will always have a bearing on surgery center sales, and the current market should remain strong for the foreseeable future, Mr. McDermott says.

"There are plenty of active buyers," he says, "particularly management company buyers and hospital buyers looking to align with local ASCs."

Buyers see how active the market is for outpatient surgical procedures, particularly in local hospitals, from which ASCs have historically drawn business. ASCs are also less susceptible to the negative effects of healthcare reform than other healthcare business. Also the ASC industry has matured, ASCs are generally viewed as a long term, stable investment for buyers, and these buyers continue to seek well-run and highly-valued surgery centers.

The ASC industry is still the “low-cost” provider for surgical services and, although reimbursement has been generally flat for the industry, it is not much of a determent for buyers, Mr. McDermott says.

"In this environment we've had some economic struggles, some flat reimbursement is not a bad thing," he says. "That’s much better than what some other healthcare businesses have experienced.”

More Articles on Transaction and Valuation Issues:
Medical Facilities Corporation Acquires Majority Interest in Arkansas Specialty Hospital
5 Steps for ASC Real Estate Monetization
20 Surgery Centers Planned, Opened or Acquired in November 2012

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