The following article was written by Jason L. Ruchaber, CFA, ASA, principal with HealthCare Appraisers.
As a business appraiser and frequent speaker on valuation topics, I have the opportunity to discuss valuation issues with individuals from a wide variety of backgrounds and experience levels. Here are three of the most common questions I am asked by ambulatory surgery center owners, administrators and potential investors.
1. What are the current valuation multiples for surgery centers?
This is a question that is nearly impossible to answer. Though it is possible to draw reference to general rules of thumb or broad averages, there are a host of factors that will ultimately determine the appropriate multiple. Factors such as geographical location, local economic conditions, case mix, number of ORs, growth expectations, CON requirements, etc., can all have a significant influence on the appropriate multiple. What we have seen is that multiples for surgery centers vary significantly, ranging anywhere from 1-10x EBITDA less debt. For the majority of deals, the average multiple for a controlling interest in a multi-specialty surgery center is 5-7x EBITDA less debt and the average multiple for a minority interest is 3-4x EBITDA less prorata debt. These ranges are appropriate for approximately 50 percent of surgery centers, and more definitive guidance requires analysis by a qualified appraiser.
2. Is my center worth more if I sell to a hospital?
In some instances, hospitals buy a freestanding surgery center with the intent to convert the ASC to a hospital outpatient department and benefit from the higher reimbursement rates received by these entities. Unfortunately for owners of freestanding centers, the HOPD reimbursement benefit cannot be factored into the value that is paid for the center. This is due to the standard of value required in nearly all hospital acquisitions — fair market value (FMV). FMV requires that the price reflect the value negotiated at arms-length between two hypothetical parties and (under the Stark Law) without consideration of the value or volume of referrals. FMV requires the business to be valued "as is", giving consideration only to changes that could be reasonably attained by the existing owners or the pool of likely buyers. The consideration of a factor specific to a single buyer would be reflective of strategic value and a violation of the FMV standard of value.
3. What kinds of things can I do to increase the value of my ASC?
There are many ways to enhance the value of a surgery center. The obvious, and admittedly more difficult, methods to increase value include increasing surgical volumes, reducing operating costs, actively managing payor contracts, etc. However, there are also many qualitative factors that influence the value of a center. As an appraiser, one of my primary functions is to assess the risk of an investment in a center. All things equal, lower risk translates into higher value for a given level of profit. When I conduct my site visit and management interviews I look for established policies to actively monitor financial and clinical performance, experienced clinical and business office staff and physicians who are engaged and knowledgeable about the business of the surgery center. I also want an honest assessment about the opportunities and threats facing the business. Owners who do not plan for potential problems are not going to be able to respond when challenges arise. It is also important to have quality financial records for 3-5 years of history. If your center does not have good financial record keeping, hire a CPA to prepare reviewed financials in advance of considering a sale or appraisal. Demonstrating lower risk will frequently translate into a higher value for your center.
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