1. What do my financials actually look like? Before diving into a transaction process, it is important to have an accurate view of the ASC’s financial performance. While net income should be considered in valuing ASCs, that number may vary from one practice to the next due to different accounting practices; thus a more standardized valuation metric is the EBITDA (earnings before interest, taxes, depreciation and amortization) of a center. Addbacks (financial adjustments to normalize the income statement due to discretionary or extraordinary expenses) must also be taken into consideration to determine an adjusted EBITDA number as ASC deals are typically based off a multiple of adjusted EBITDA.
2. Who’s the right partner? While the traditional field of acquirers and investors has typically been hospitals/health systems or ASC management companies, institutional investors, such as private equity (PE) groups, and other investment firms have increasingly viewed the ASC sector as a relatively stable investment opportunity. PE firms offer many of the benefits of ASC management companies, but also have the resources and capability to provide additional financial and human capital resources and relative autonomy in running the company assuming certain investment criteria are met. Currently, some of the largest ASC management companies, including groups such as United Surgical Partners and Surgical Care Affiliates, are financially backed by PE firms.
3. Majority or minority? Depending on the amount of equity and control that owners are comfortable in divesting, the valuation of an ASC may also fluctuate. While a seller must carefully consider the implications of a majority or minority deal outside of the cash proceeds to be received, it’s also worth noting that typically minority deals will be valued at a small discount as compared to majority recapitalizations due to the perceived lack of control.
4. When’s the right time to consider a strategic scenario? Timing can also be critical in obtaining the most attractive offers for an ASC. Regardless of whether or not the buyer is a hospital, ASC management company or institutional investor, investors do not want to pay high multiples when an ASC has hit its peak from a caseload and financial perspective. It is a misconception that companies should only sell after hitting their peak performance with the idea that this may result in the highest multiple. The reality is that both strategic buyers and investor groups must be able to recognize additional growth opportunities to make an attractive return on their money. When the ASC is still performing at an upwards trajectory and still has “blue sky” ahead, that is the most optimal time to begin exploring options for a sale.
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