1. Prices are down, with fewer deals. Many lenders have pulled back from financing healthcare deals, and those that are still in the market are including greater equity requirements to finance an acquisition, says Mr. Karnes. Previously, ASC purchasers could finance a deal by putting 20 percent down. Now lenders generally require 33 percent, which is more of a hurdle. In addition, buyers are being asked to guarantee more of the debt, often 100 percent, which makes them examine each deal much more carefully before pursuing it.
That said, Mr. Karnes believes the lending environment is likely to pick up somewhat in the future. "While we may never return to the 20-percent equity, no-guarantee environment, it will stabilize, and well-conceived projects will get financed, and the terms will get a little better," he says.
2. Overall valuations are down, driven by economy. Overall economic uncertainty has given people reasons to delay elective surgeries, which translates into lower case volumes at many ASCs, especially those that focus on elective procedures such as plastic surgery and gastric bypass. "This has lowered the financial results of ASCs that perform these types of surgery, which means they're less valuable," Mr. Karnes says. Healthcare reform might turn some of that around, but it's unclear how and where its effects will be felt the most at this point.
"Facilities located in urban areas, where a significant percentage of the population has not had any insurance, should benefit from having more cases," Mr. Karnes says. "The negative side is that you're going to get paid at Medicare or Medicaid rates."
3. Mix of specialties and geography drive valuation. The single most important factor in assessing valuation, according to Mr. Karnes, is the mix of specialties performed by an ASC's physician owners. "We look for higher-end specialties like orthopedics, spine, general surgery," On the flip side, plastic surgery, stand-alone pain management, and stand-alone ophthalmology are less valuable, he says. With a single specialty there is simply too much reimbursement risk exposure. Valuations are also enhanced when there is additional capacity not yet being used, or when it is clear that there is the potential to bring in new specialties to the center in the future.
From a geographic standpoint, ASCs already established in certificate-of-need states have higher valuations because future competition is less likely, Mr. Karnes says. The CON process is simply long and expensive, making it difficult for new competitors to enter the market unless they have a hospital partner to help shoulder the burden.
4. Higher multiples are driven by intangibles like management skill. Some aspects of an ASC's valuation can be hidden, only emerging during the due diligence process, says Mr. Karnes. One of these is management. Presenting detailed financial records that are easy to understand and having solid control over the non-financial parts of the business, such as a good grasp of a center's supply dollars per case and labor hours per case can enhance a presentation to a potential buyer. "If you have poor control over key statistics," Mr. Karnes says, "some buyers may give up and not see the true value. I think you get a better multiple if you can present your story well."
Regent Surgical Health develops, manages and invests in surgical centers and specialty hospitals throughout the United States. Regent works to deliver sustainable profitability while enabling physician partners to maintain clinical autonomy and financial control. Learn more about Regent Surgical Health.