Trends in ASC Valuation & Transactions: Thoughts From HealthCare Appraisers
At the 12th Annual Spine, Orthopedic and Pain Management Driven-ASC Conference in Chicago on June 12, Todd J. Mello, ASA, CVA, MBA, partner and co-founder of HealthCare Appraisers, discussed important trends in ambulatory surgery center valuation and transactions.
"It is important to understand that valuation is a forward-looking exercise," said Mr. Mello. "Anyone buying into a center, whether a hospital or management company, will look at history as a means to predict the future."
There are several approaches to valuation, such as:
• Market approach
• Income approach (i.e., discounted cash flow)
Valuation multiples are essential to understanding the ASC valuation process. The financial notation for determining a multiple is 1/(K-g). "K" represents risk, while "g" represents growth. "The more growth expected in the center over time, the higher multiple," said Mr. Mello. Conversely, the more risk that could potentially impact future earnings, the lower the multiple. Generally speaking, buyers will pay more for higher multiples, which demonstrate a center's ability for stable growth, with little risk.
The following factors tend to contribute to higher multiples.
• Diversification of specialties and surgeons
• High percentage of cases performed by physician-owners
• Established history of expected and continued distributions
• Little debt over time
• Barriers to market entry, such as a certificate of need
• High percentage of in-network volume
According to the HealthCare Appraisers 2014 ASC Valuation Survey, observed multiples for minority and majority interests have significantly increased year over year. Majority interests command higher multiples; buyers are willing to pay a premium price for the control a 50 percent or greater ownership will afford them.
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