How Does a Physician Buying ASC Shares Determine Fair Market Value for the ASC Shares: Q&A With Scott Becker

Q: As a physician wanting to purchase a share in an ASC, how do I know what the fair market value is?

A: In simple terms, assuming the physician is buying a minority interest in the ASC, typically the fair market value is 3-5 times EBITDA minus debt. This provides the value of the equity of the center. Then, the price is determined by the percentage of shares being acquired times the fair market value.

If the ASC has just started up and not established a regular cash flow, the valuation is typically based on the physician paying the same amount per share as the other investors.   This amount is based on the equity needs of the center.  

According to Greg Koonsman, senior partner of VMG Health, several factors could impact the price per share for physician investors. "Physicians approaching retirement are liable to leave the ASC soon, putting the center's future into question," he said. He added that an ASC with few physician-owners would be more of a risk because "if something happened to these investors, it would have grave repercussions for the fate of the ASC."

According to HealthCare Appraisers' Healthcare Transactions 2009 Year in Review, 41 percent of purchase prices are determined with an independent fair market value opinion. This is the most popular method, followed by using a predetermined formula (28 percent), using a board-determined amount (24 percent) and other methods (7 percent).

As more formal background, one should note that there are three core methods of valuing a business such as an ASC.

1. Income approach or discounted cash flow approach.
Look at expected income over the next five years and determine the center's expected value at the end of five years (i.e. the terminal value). The income and terminal value (the value of the center at the end of the estimation period) are then discounted to present value to determine the value of the center.

2. Market approach. Look at how similarly-situated businesses sell shares compared to their earnings or revenues. The multiple of EBITDA approach discussed above essentially relies on this approach.

3. Replacement or cost approach. Look at the equity other investors have put into the center — in other words, the cost to build or replace the center. "If it costs $4 million to build a center, and $3 million of that is debt, the equity people are putting in $1 million," Mr. Becker says. "So if the [physician] is putting in 10 percent, he should be putting in $100,000." This cost method is most often used in start up and non cash flow situations.  

The physician or the center could also ask the ASC to obtain a third-party valuation from an experienced ASC valuation firm to ensure that shares are being sold at fair market value. The physician might also be advised to discuss the purchase with consultants, accountants and lawyers who are knowledgeable about ASC valuation.

Contact Scott Becker at sbecker@mcguirewoods.com.

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