There are three approaches to ASC valuation: the cost approach, the income approach and the market approach. The cost approach is most commonly used for new centers and those that aren’t making money. Basically, the purchasing company determines what it would cost to replicate the center, and then uses that cost to value the ASC.
Hospitals typically use the income approach (present value of future income) when determining an ASC’s value. They project income for the center for the next seven years, and then discount the income to a present value. For example, if a center is making $1 million profit per year and flat growth is projected over the next seven years, the income of the center will be projected at $7 million. The hospital will then discount the $7 million to today’s value based on a required rate of return (of say 10 percent) which results in a present value of approximately $3.5 million, plus a terminal value, less long-term debt.
ASC management companies, on the other hand, typically use the market approach, which is based on a multiple of the center’s trailing 12-month’s (TTM) EBITDA. For example, if a center’s TTM EBITDA is $1 million, and the company values a center at 6 times EBITDA, the value is $6 million, less long-term debt. The market approach almost always yields a higher value than the income approach unless you are projecting very substantial increases in income.
Q: What can ASCs do to make sure they are getting a fair value for their center when two different approaches are used?
JV: When we assist our clients in obtaining a purchase proposal from a hospital, we also solicit competitive purchase proposals from leading ASC management companies. This way, we can demonstrate to the hospital a “proven fair market value,” and the ASC’s physician-partners will have choices of potential partners and leverage when it comes to negotiating a deal.
This strategy also can present new opportunities for the physician-owners. The hospital is likely to increase their offer, and the physicians may find it beneficial to consider a three-way partnership with the hospital and a management company. This three-way structure presents the dual benefits of a hospital partner with superior payor contracts and a management partner that will operate the center efficiently and economically and will look for ways to improve the business.
Q: Is there a single operational factor that can affect an ASC’s value?
JV: The best way to make a center more attractive for acquisition is to identify (not recruit — leave that to the buyer) new physician-prospects. Buyers will be more attracted to and will offer higher consideration for centers that have identified new areas of growth, including new physicians who could be recruited by the acquiring company. With access to new partners, the ASC can bring in new specialties and new procedures that will result in increases in revenues and profits.
We recommend that the physician-partners identify busy surgeons who they believe would be a good fit for the center. Have your physicians create a “prospect list” of 10-15 physicians in the area. You don’t have to recruit them; the prospect list will demonstrate that your ASC has potential for growth.
Mr. Vick is the president of ASCs Inc., and has assisted physician owners at over 200 ASCs and endoscopy centers to form strategic relationships with hospitals and leading ASC management companies, since 1984. To learn more about ASCs Inc., call 760-751-0250 or visit www.ascs-inc.com.
