2014 ASC Valuation Trends: Key Insights From HealthCare Appraisers

During an April 17 webinar hosted by Becker's ASC Review, Todd J. Mello, ASA, CVA, MBA, founding partner of HealthCare Appraiser, and Nicholas A. Newsad, MHSA, a manager with HealthCare Appraisers, discussed the HealthCare Appraisers 2014 Valuation Survey. The survey serves as a tool with which ASC leaders can gain a sense of the overarching valuation and ASC company trends shaping the industry.

Understanding valuation multiples
ASC valuation, a nuanced process, is often discussed in terms of earnings multiples. Before diving headlong into valuation and forces driving its trends, ASC leaders must have a firm grasp of what a multiple is. The financial notation for determining a multiple is 1/(K-g). "K is the approximation of the risk of achieving the cash flows that are projected," said Mr. Mello. "G is the projected sustainable growth rate." Multiples can be used by ASC owners, and prospective buyers, for comparison purposes for ASCs that haved reached a steady level of growth.

How does variation in growth and risk affect multiples? In a scenario with risk of 17 percent and growth rate of 2 percent, the multiple would be 6.67x (1.0 /(0.17 - 0.02). If growth jumps up to 3 percent, the multiple will change to 7.14x (1.0 /(0.17 - 0.03). "If a center is expected to grow more, that should generally command a higher multiple," said Mr. Mello. In the case of increasing risk, the inverse is true. As risk goes up, the multiple will go down.

Multiples, while a useful tool, tend to apply more to surgery centers that have reached maturation. "It is not atypical for a newer ASC to grow 25 percent in one year and then taper down," said Mr. Mello. Multiples will not provide a useful estimation in value until an ASC's growth has leveled off.

Observed multiples: majority vs. minority interests
Majority and minority interests represent different opportunities for buyers. "Interests that provide control, 50 percent or greater, are worth more than interests which do not have the same control rights," said Mr. Mello. "A majority owner can make major decisions, and people are willing to pay a premium for those rights."

From 2013 to 2014, the multiples for minority interests in single-specialty and multispecialty ASCs have been trending upward. In 2013, 8 percent of ASC companies observed valuation multiples of 5 to 5.9x for minority interests in single-specialty ASCs, but in 2014, 21 percent observed multiples 5 to 5.9x. Similarly, observations of minority interests of multispecialty centers jumped from 25 percent of companies reporting 4 to 4.9x multiples in 2013 to 38 percent reporting 4 to 4.9x multiples.

In the case of controlling interest multiples, 20 percent of ASC companies reported observing multiples of 7 to 7.9x for majority interest in single-specialty ASCs, up from 7 percent of companies observing these multiples in 2013. In 2013, less than half of ASC companies reported multiples of 7 to 7.9x for majority interest in multispecialty centers, but this year that percent has risen to 52 percent. "Multiples for multispecialty centers, even at the noncontrolling level, tend to be higher than single-specialty centers," said Mr. Mello. "This tends to boil down to a diversification issue."

What do buyers expect?
Potential ASC buyers interested in either minority or majority ownership will have different expectations of single-specialty and multispecialty centers, and these expectations will affect how buyers view potential acquisitions.

Single-specialty ASCs tend to be smaller and have fewer physician owners. "Buyers are expecting a greater number of physician owners in connection with multispecialty centers," said Mr. Mello. "This is a risk diversification strategy." While single-specialty centers may not have as many owners, the expectation is the case load is still spread out enough that a center's success, or failure, does not hinge on a single physician. Of the 25 ASC companies included in the HealthCare Appraisers 2014 Valuation Survey:

•    54 percent prefer six to 10 owners in a single-specialty center
•    41 percent prefer 11 to 15 owners in a multispecialty center

ASC buyers expect to see a return from their investment. More than half of buyers, 56 percent, expect to see an initial earnings growth rate of 3.1 to 6 percent post-transaction.

ASC management services
ASC management companies are one of the primary buyers in the industry. Some companies may manage centers they do not own, but 64 percent report holding ownership in all managed ASCs. "We have seen growth in the number of ASC management companies, meaning an increase in competition," said Mr. Newsad. "It is not yet a definitive trend, but competition seems to be driving down management fees."

Of the companies responding to the 2014 survey, 48 percent offer sliding management fees, in which fees decline after a predetermined threshold. For example, if an ASC meets or exceeds revenue thresholds, the management fee will decrease from 6 percent of net revenue to 5 percent, said Mr. Newsad.

Management company services vary, but the majority offers the following:

•    Access to group purchasing organizations
•    Oversight by a regional vice president of operations
•    Mock accreditation surveys
•    Corporate business development executive and staff
•    Managed care contracting
•    Benchmarking based other equity-owned centers
•    Access to corporate revenue cycle executive or staff
•    Accounting  
•    Corporate supply chain  
•    Corporate human resources

On the other hand, services such as dictation or architecture and design are less likely to be included in a management fee.

More than half of ASC companies, 52 percent, offer their clients centralized billing services. "ASC billing fees are very competitive," says Mr. Newsad. "Two-thirds of ASC management companies observe charges of 3 percent to 4.9 percent of net revenue in the market." Though a significant number of management companies offer billing services, utilization of those services varies greatly amongst ASC companies.

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