Looking to Increase a Surgery Center's Value? 6 Expert Tips

1. Understand case volume and physician employment trends. Physician employment may disproportionately affect centers with high non-owner case volumes, said Jason Ruchaber, CFA, ASA, partner at HealthCare Appraisers. If the surgery center's case volume is heavily dependent on non-owners, the ASC's pricing may be depressed because of the risk that the physicians will cease to participate without notice.

"Owners tend to have more stable surgical volumes because they're invested and have a financial stake in the business," he said. "Non-owner physicians are easier targets for employment, and if there's no tie to that center, the case volume could disappear overnight."

2. Make more money. The correlation between earnings and value is pretty straight-forward: The more money you make, the higher your valuation, Mr. Ruchaber said. To increase value, a surgery center should have a solid understanding of its financial position and be able to articulate what they are doing to maintain and enhance earnings.

"When we're doing financial analysis, we want to see a center or hospital that has a good grasp of what they're doing financially," he said. This means creating budgets and analyzing variances, evaluating costs on a regular basis, and understanding the contribution margin of different case types/service lines.

3. Develop a loyal and diverse physician base. One of the most important factors — and potentially the biggest risk — to a surgery center valuation is the physician base. An ASC with a sizeable number of physicians equally sharing the case load will have less risk than an ASC with only one or two key physicians, said Colin McDermott, CFA, CPA, a senior manager with VMG Health in Dallas.

If your ASC has a handful of physicians performing most of the cases, encourage those physicians to motivate their colleagues to increase the work load and better diversify the number of physicians using the facility. "Really get your physician base to work together as a cohesive unit," he said.

When all physicians are on the same page and understand the importance of being loyal to their center, then the center's valuation will increase through the physicians bringing more cases to their center. The physician loyalty will bring about stronger operating metrics due to higher case volume, which is a crucial indicator of a center’s monetary value.

4. Conduct independent valuations. An independent business appraisal creates a valid assessment of the business without the biases of the person selling the ownership interests, said Todd Mello, partner and co-founder of HealthCare Appraisers. This adds legitimacy to the pricing of the ownership units and the projected financial returns. Risk-adverse investors may be disinclined to invest in a private company that may only prepare its financial statements once or twice per year.

When appraisers value a business, they look at the business as it is based upon information known or knowable as of the valuation date. This is not to say that an appraiser cannot factor in certain adjustments to revenue or expense expected to be realized in the future but not specifically related to the incremental revenue and case volume associated with the prospective physician investor, he said.

5. Properly manage expenses. After physician diversity and volume, potential buyers will be cognizant of an ASC's expense management. Even centers with a diverse group of physicians and cases may have mismanaged expenses or overspending. "Always be thinking about what you can do to control expenses and the bottom line," Mr. McDermott said.

Staffing efficiencies and cost-effective supply management drive stronger values for ASCs. Financially struggling centers should look to cut costs wherever possible. For instance, an ASC with a strong orthopedic focus could work with its distributor to access a single implant manufacturer and leverage this volume to achieve cost savings, he said.

6. Understand where potential for growth exists. The highest multiples are generally paid for those centers which are demonstrating strong growth, Mr. Ruchaber said. Because growth is key to a successful valuation, his company looks for facilities that understand where they can expand case volume and recruit physicians. "It's about understanding the demands of the community and the population base," he said.

Mr. Ruchaber likes to see a facility that puts together budgets and actively pursues different strategic initiatives, whether they're business, clinical or expansionary. Growth is also related to the quality of the institution; a facility with high-quality equipment, updated operating rooms and capable staff is more likely to attract physicians and patients than one in need of significant upgrades.  

More Articles on Transactions and Valuations:
$2.4M Triangle Orthopedic Associates ASC Opens in Pennsylvania
Skyline Surgery Center Opens in Idaho
Merritt Healthcare to Develop River Valley ASC in Connecticut

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