6 factors dictating investment and M&A activity in the ASC sector

Here are 6 key factors that come into play when looking at investments and mergers and acquisitions in the ASC sector.

1. More buyers: The outlook for investment and M&A activity in the ASC sector is very positive and there continue to be more transactions than in prior years. This is due to more buyers seeking to invest in centers and more physicians seeking partners to help them achieve strategic goals, such as adding new physician-partners, new procedures, etc., and as an exit strategy for the founding physicians who may be approaching retirement. While the number of centers remains around 5,500, there are now over 50 potential buyers for each center including ASC management companies, hospitals, and private equity firms that are creating ASC networks.

2. Pricing models: Due the increased number of potential buyers and increased competition to invest in centers, the prices offered continue to increase. While a few years ago pricing in the 6X to 7X trailing 12-month (TTM) EBITDA was the norm, we are now seeing multiples in the 7X to 8X TTM EBITDA range being offered for healthy multi-specialty centers, with additional upside depending on the growth opportunities at the center. It is interesting to note that the ASC management companies almost always offer a higher value than the local hospital will offer. This is usually due to the fact the hospitals use an "Income Valuation Approach" or "present value of future cash flow" model wherein they discount the EBITDA going forward, while the ASC management companies use a "Market Valuation Approach" or a multiple of EBITDA with no discount. This is why we recommend getting offers from the management companies first as this establishes a fair market value that is almost always higher than the value that will be determined by a hospital.

3. Transactions are more complex: Increasingly the selling physicians are looking for more than just a cash sale - the physicians are seeking a strategic partner that can help the center and their practices grow. Thus an ASC management company that has a track record of recruiting new partners for the center and/or introducing new procedures, such as total joints or spine procedures, will be a much more attractive partner than a firm that brings just cash to the table. Additionally, some companies are investing in practices, anesthesia companies, and other ancillary services with their physician-partners, or bringing in the hospital as a minority partner, thus adding to the complexity of the transactions.

4. All types of centers in demand: While most of the deals that are publicized are those between successful ASCs and leading ASC management companies and/or hospital partners, there are many surgery centers that are not doing well and that are considered "turn around" opportunities. These include large and small single and multi-specialty centers. With the strong demand for centers from investors there are buyers for most types of centers as long as they are in decent markets, have 2 or more ORs, and are AAAHC accredited or Medicare certified. A number of firms will invest in these centers, improve their contracts, recruit new physicians and turn them around so that they are profitable. Then these centers can be sold at a significant ROI to one of the larger ASC management companies or a hospital and generate very attractive returns for the physician-owners and their strategic partners.

5. OON vs INN: The value of centers that are out-of-network  has dropped considerably in recent years due to the unsustainability of OON model ASCs. Many payers are either not paying the OON charges or are severely discounting them and making it extremely hard for centers to collect the fees being billed. Thus it is very difficult to find a buyer or strategic partner for an OON center unless the center is willing to accept a heavily discounted multiple. Most (over 75%) potential buyers will value the center based on what they would have been reimbursed as an in-network facility or apply a higher risk factor or discount rate when they value an OON center.

6. Investment in ASC real estate: Over the last 2 years there has been a significant increase in the sale and leaseback of ASC/MOB real estate owned by the physicians. Low interest rates and the historic profitability of surgery centers are attracting more buyers and high prices with no change in rent, allowing the physician-owners to sell at the top of the market, invest the proceeds in higher yielding investments, and continue to enjoy the cash flow from the surgery center operations.

ASCs Inc., has assisted in development, merger, and strategic acquisition transactions for over 500 physician-owned ambulatory surgery (ASCs), endoscopy centers (ECs) and surgical hospitals since 1984. The company has extensive experience in ASC and EC sales, development, business planning, operations, valuations, and strategic mergers & acquisitions and can be reached at 760-751-0250. The company also helps physician-owners of ASC real estate to sell and leaseback the real estate. More information is available at www.ascs-inc.com.

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