6 Common Questions on How to Determine and Increase ASC Value: Q&A With Blayne Rush and Curtis Bernstein
Q: What is the difference between market value and fair market value (FMV)?
Blayne Rush: To answer that question we must look at their definitions first. The Internal Revenue Service defines FMV as the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts." The Social Security Act defines FMV for purposes of Stark regulations as the value in arm's-length transactions, consistent with the general market value. General market value means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers.
The FMV is not the real world. It's hypothetical. It's highly regulated. It assumes that willing buyers and sellers exist, that the power among them is proportionately distributed and they are under no compulsion. It defines the participants as very specific and predictable actors, it assumes that the players are rationale and consistent in their dealings, including the appraisers who theoretically use fair judgment when they apply certain methods for their valuation. In other words, FMV is a value world of hypothetical willing buyers and sellers in a hypothetical business transfer.
The FMV business valuation is based on assumptions that a sale is taking place between a hypothetical predictably rationale buyer and seller when, in fact, the real world is populated by real people whose actions are very unpredictable, not subject to consistent definitions and who engage in actual transactions with unpredictable outcomes.
To make the contrast against the hypothetical world of FMV, market value describes the value of a business interest in the marketplace — it is the real world value of your surgery center. Market value, simply put, is the highest purchase price available and the best terms available for a particular ASC in an open and competitive marketplace. Market value focuses on determining the highest and best value for your surgery center business.
Q: How do buyers determine their offering price when approaching ASC acquisitions?
Curtis Bernstein: Buyers, no matter who they are, as long as they're purchasing the interest from physician-owners where the physician-owners remain within the ASC, are required to follow the FMV standard under the Anti-kickback statute. You can't pay in excess of FMV because that excess may be considered payment for referrals.
So, you have to pay FMV. The question then is the following: How do buyers actually determine what FMV is? That really varies. We have a number of clients that are pretty sophisticated and feel they know what FMV is. They do an internal calculation of what they believe to be FMV and offer that price without ever getting a valuation opinion.
We have other clients who go through the same process, but at the end of the day want that FMV opinion to support the purchase price. Generally they've worked with a number of valuators and know where an opinion from someone like me would come out. They're pretty comfortable going out, making offers and starting the process before engaging a valuator. This can make sense because the valuation process can be lengthy.
Then there are other buyers that require a valuation and want to know the FMV from an independent perspective before they ever make an offer to purchase the acquisition.
At the end of the day, regardless of which approach is taken, the price is determined based on the expected market rate of return and the expected cash flow of the center. While we look at historical cash, which is very interesting, projected cash flow is probably most important in determining FMV and what can be done with the center [to increase the cash flow]. Is the center already at capacity? Is there ability to grow? Where is reimbursement set under current managed care contracts? Is there ability to improve the reimbursement? What types of physicians are operating within the center? What specialties are represented? What are the chances those physicians are going to become employees of a hospital? Is there ownership interest already by the hospital?
Once the projection is developed, the second thing a valuator considers is the rate-of-return. Some buyers may look at it from their internal rate of return. From a FMV perspective, it generally has to be a market FMV. And there has to be some tie-in between that market value and FMV because there are different rates of return in the market.
In summary, there are a number of different ways buyers can determine the price, and then valuation should go hand-in-hand with what is reality for those buyers.
Q: What can an ASC do to increase its value?
CB: A lot of buyers look at multiples of EBITDA. They may be trailing 12 months EBITDA or projected EBITDA. I think one of the best things an ASC can do to increase value is prove that projected EBITDA is going to be significantly different from trailing EBITDA, and why it's going to be significantly different.
Syndicating the surgery center to additional doctors, getting more doctors involved, locking them into non-competes — those are steps you can take to increase the ASC value from what you've had historically. The buyers look at profits, what are the risks associated with keeping those profits in the future and what can be done to increase those profits in the future.
Management companies and the private equity groups have investors, and when they deal with their investors, their investors will look at same-store growth, and what they want to see if the bottom line for this ASC increased year over year. That's going to increase in a number of ways — patient volume, net revenue per case and decreased costs and efficiencies gained. The more your ASC has the ability to achieve those different areas, the higher it's going to have in value to an owner.
Q: What can an ASC do to increase the number of offers it receives from buyers and the value of those offers?
BR: Whenever sellers of ASCs go into this process, they need to be prepared and understand what they want out of this — what are their goals. They also need to know the goals of the potential buyers because buyers that want what you have will make the highest offers. You need to do homework and prepare your center for sale. Preparation organization of your center will show the buyers you are educated and informed. Then you'll be in a better position to be able to convey the historical and the future story of the center. Not doing that will increase the likelihood that the entire story and potential of the center will not be known to the buyers.
Buyers are going to come in, have conversations and look at your center, but they'll often miss pieces that are very important and could lose interest. If they had the right information, they could become more interested in your center.
The valuation community has defined hypothetical willing buyers as any likely buyer, so it's to your benefit to hunt down any likely buyer. You need to go into the marketplace and be proactive versus reactive. A lot of these surgery center companies and buyers will have their development staff come to you and ask if you are interested in selling your center. Even if that happens, you still need to consider multiple other potential buyers as well because you're going to turn around and leverage them against each other and negotiate them against each other. That will help create competition for your center, help get more offers for your center and help drive up the price you ultimately get for your center.
Q: Would receiving higher offers be in violation of the Anti-kickback statute?
CB: It's important to understand that while the buyers are restricted by the FMV standard under Anti-kickback, that doesn't mean a buyer has to offer FMV. With regard to surgery centers, you're dealing with surgeons who refer to the ASC, and ultimately what buyers are trying to ensure is that they're not paying above FMV because any compensation or remuneration above FMV would be considered a kickback for referrals to the ASC.
If you go out to your local health system looking to sell your ASC and they come back with an offer, even if they have a separate valuation done, that doesn't guarantee that the offer you're receiving is the maximum number that is determined in the valuation. It could be lower. So you will want to go out and get different offers to make sure you're getting the highest value. The buyers may not always come back with their highest offer, so you will want to go back to them. The buyers should only go up to the point where they feel comfortable that they're still paying FMV for that ASC and that interest in the ASC.
From a seller's perspective, the seller needs to feel comfortable that the buyer is going to go up to a point where they feel they've hit the maximum they can support and still be comfortable that they're not paying more than FMV under Anti-kickback or under the private inurement rules if the health system is a non-for-profit.
Q: How can market value influence FMV?
BR: FMV is typically presented as a value range or a range concept. Rarely will you see a singular number presented as the FMV of an ASC. You want to go out and present your center to multiple buyers and buyer types at the same point in time and then negotiate with the ones that have interest in your ASC and come up with bona fide offers. By bona fide I mean written offers from parties that have a strong interest in purchasing your ASC at that offer price. Doing this will allow you to push the purchase price to the top of the FMV range because a lot of times these buyers will come in evaluate your center, make an offer and tell you it's FMV. Or perhaps they'll get a fair market valuation from a valuation professional, but sometimes that valuation professional isn't an ASC expert or some of their data is many years old. This process will help align the fair market valuation professional to what the market looks like. So if you take those bona fide offers that you get, present them to the fair market valuation expert, that will allow them to be educated on what the real market looks like at that point in time.
Blayne Rush, president of Ambulatory Alliances (www.AmbulatoryAlliances.com), is an SEC-registered and FINRA-licensed investment banker. He specializes in ASC brokerage; ambulatory surgery center turnarounds and increasing ASC valuations through physician recruitment and syndications; and access to the capital markets and capital structuring consulting for surgery centers, urgent care centers and radiation oncology centers.
Curtis H. Bernstein, ASA, CPA/ABV, CVA, MBA, is managing director of Sinaiko Healthcare Consulting (www.Sinaiko.com). He specializes in providing valuation, transaction advisory, strategic and operational consulting services to clients. He has extensive experience working closely with hospital systems, physician groups, ASCs and other healthcare providers.
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