The Buying and Selling of Ambulatory Surgery Centers - A Review of Pricing By Tier in the Current Market – Updated for 2010

This article focuses on the pricing by companies that purchase majority interests in ambulatory surgery centers (ASCs). Currently, there are three public companies that buy majority interests in ASCs and eight to ten private companies that fit into this category.  These companies generally buy more than 50 percent of the interests or assets in an ASC transaction, typically buying anywhere from 51-66 percent of such interests or assets. There are also several companies that focus on acquiring minority interests in ASCs. The lists below are not all-inclusive lists nor do they specifically focus on hospital acquisitions of ASCs, which is also an incredibly active part of the market.

Majority Interest Buyers
Public Companies
The principal public company buyers that acquire ASCs include:

Amsurg   NovaMed
Medical Facilities Corporation
Private Companies
The principal private majority- interest buyers that acquire ASCs include:
Meridian Surgical Partners United Surgical Partners
Symbion, Inc.   Surgical Care Affiliates
RMC Medstone 
National Surgical Care
Covenant Surgical Partners Health Inventures
Minority Interest Buyers

In addition to the majority interest buyers, there are a number of companies that purchase minority interests (and sometimes purchase majority interests) in ASCs.  Several of the most prominent companies in this category include:

Ambulatory Surgical Centers of America

HealthMark Partners
Blue Chip Surgical Partners   Practice Partners in Healthcare
Regent Surgical Health
Surgical Care Affiliates
Surgical Management Professionals
Orion Medical Services
ASD Management    
Nueterra Healthcare
Pinnacle III
Physicians Endoscopy
Foundation Surgical Partners
Surgical Management Professionals Titan Health Corp

Valuation* and Types of Deals
Tier One Deals and Criteria.  The pricing of ASCs (for majority interest transactions) can be broken down into three different tiers. The first tier of ASCs includes what are considered low risk acquisitions. These first tier ASCs typically measure positively with regard to the following seven characteristics:
      (i) limited reimbursement risk;
      (ii) relatively low out-of-network percentage of business,
      (iii) not overly dependent on too few physicians
      (iv) limited non-compete problems;
      (v) reasonable market conditions in terms of competition and hospital control;
      (vi) certificate of need protection; and
      (vii) some degree of independent surgeons and cases in the market.

For these low risk transactions, we often see prices of 6 to 6.5 times EBITDA (or higher) minus debt. As part of this transaction, buyers often acquire 51 to 66 percent of the target ASC's units (by either directly purchasing units in the existing company or through some form of an asset contribution transaction), and the ASC enters into a long-term management agreement with the buyer. The management fee is typically five to seven percent of collections. Often, the buyer, as part of the pricing, acquires an agreed-to amount of the accounts receivable minus the accounts payable. The seller must often also pay for tail coverage to cover potential malpractice claims for the period prior to the transaction closing.

Tier Two Deals. A second tier of ASC transaction pricing includes ASCs that have, of the characteristics listed above, one to three characteristics that pose significant risks. For example, this might be a center with a minimum number of recruitment options, or it might be a center with some significant competition or reimbursement risks or certain other risks. In essence, when an ASC measures negatively for one to two of these characteristics, it might be included in this second tier and be priced accordingly. Please bear in mind that being very negative on certain of these characteristics can turn a tier one deal into a tier three deal versus a tier two deal.  For example, if the ASC relies on one to two physicians for case volume, or if many physicians in the venture have significant outside competitive interests, this can make the deal a tier three deal versus a tier two deal as these factors may pose significant threats to the ASC's ongoing revenue stream.

For tier two deal pricing, we often see pricing set at 4 to 6 times EBITDA minus debt.  The actual price within that range is very dependent on the depth and number of the different risks present.

Tier Three Deals. Finally, we see tier three deals as deals that have many of the risk characteristics listed above. This may include a market in which a hospital relentlessly competes and/or employs many of the physicians in the area, a market in which there are few independent physicians or a market in which the hospital and payors are very closely tied together. There are typically few buyers for these ASCs, and if in fact you do find a buyer for this type of ASC, you are often looking at a price of 2 to 4 times EBITDA minus debt. Often, for these types of deals, the seller would approach one of the minority interest buyers with the intent of restructuring the venture to improve it for greater profitability going forward. In essence, instead of attempting to make a capital gain from the transaction, a seller may focus on finding a buyer that will buy a minority interest and help manage and improve the center's profitability and stability, with the hope of selling to a majority interest buyer (for a higher EBITDA multiple) after the ASC has improved and therefore would be more attractive to a majority interest buyer.

*    *    *

To summarize, an ASC generally must measure positively on the seven characteristics described above in order to receive the most favorable pricing from a majority interest buyer (i.e., 6 to 6.5 times EBITDA minus debt). An ASC that measures well on four to five of these characteristics but poorly on two to three of these may receive a valuation of 4 to 6 times EBITDA minus debt. If an ASC measures poorly on all or most key characteristics, it will likely receive little interest from majority interest buyers (or a lower price) (i.e., 2 to 4 times EBITDA minus debt). ASCs that measure low on these characteristics that are seeking a buyer might focus on soliciting offers from minority interest buyers, and improving profits, and potentially selling to a majority interest buyer in the future after the ASC has improved on these characteristics. Finally, keep in mind that when a buyer is buying minority interests, as opposed to majority interests, pricing is often significantly reduced.

* The guidance is in this article is intended to provide an overview of the factors influencing valuations of an ASC.  A formal valuation is often needed. There are several firms that specialize in the valuation of ASCs and other health care companies. Three of the most prominent firms that we work with regularly are VMG Health, Healthcare Appraisers and Principle Valuation.

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