Opinion: What is Your ASC Worth: Fair Market Value vs. Market Value

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The following article is written by Blayne Rush, MHP,MBA, president of Ambulatory Alliances. These are the opinions of the author and not necessarily those of the publication or publisher.


At virtually all ambulatory surgery center business meetings, you will be able to attend sessions regarding the value of your ASC, which are invariably taught by business valuation professionals. In fact, while I was attending one of these conferences recently, the leader of one of the larger, well-respected valuation firms essentially said that buyers would respect you more if you obtained a fair market valuation prior to approaching the ASC management companies to buy your center. He went on to declare business brokers valueless. The thought that went through my mind at the time was, "What world are you from?" As it turns out, he was from a different world — a hypothetical one.


To delve deeper into the reasons why a hypothetical fair market valuation can be so different than a center's real market price, let's first get a firm understanding of fair market value (FMV). It's the common, default standard way to talk about an ASC's value. The Internal Revenue Service defines FMV as "the amount at which property would change hands between a willing seller and a willing buyer when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and when both have reasonable knowledge of the relevant facts."


Similarly, Section 1877(h)(3) of the Social Security Act defines FMV for purposes of Stark regulations as "the value in an arm's length transaction, consistent with general market value." Specifically, the regulations (420 CFR 411.351) state: "Fair market value means the value in arm's length transactions consistent with general market value. 'General market value' means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party; or the compensation that would be included in a service agreement as a result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition or at the time of the service agreement. Usually the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement."


Hypothetical world of FMV

The FMV world is not the real world; it is hypothetical. It's highly regulated, and it assumes that willing buyers and sellers exist, that the power among them is proportionately distributed and that they are under no compulsions. It defines the participants as very specific and predictable actors. It assumes that the players are rational and consistent in their dealings, including the appraisers who theoretically use fair judgment when they apply certain methods for the valuation. In other words, FMV is a value world of hypothetical willing buyers and sellers in hypothetical business transfers. Keep in mind that the business valuation practitioners who use FMV study corporate financial theory and public accounting, and by their nature they will lead to conservative valuations.


"But," someone will say, "FMV does incorporate real life data when it uses bona fide sales prices for assets of like type, quality and quantity." I would counter that it's basically impossible to find a "comparable" sale to your own ASC. In the valuation, are they really comparing oranges to oranges or is it an orange to lemons? For previous bona fide sales to be comparable to your future sale, they would have to have taken place in the exact same market at the exact same time of acquisition that you yourself are selling your ASC. Unless you and your twin brother both own ASCs side by side on the same street and are selling them the same day, it would be impossible for any two ASC sales to be effectively compared.


Furthermore, the FMV business valuation is based on the assumption that a sale is taking place between a hypothetical, predictably rational buyer and seller. In fact, the real world is populated by real people, whose actions are very unpredictable, not subject to consistent definitions and who engage in actual transactions with unpredictable outcomes.


A better world: Market value

I have many conversations each week with physician-owners of ASCs, and they always ask me what their center is worth. In most instances, they want to know the highest and best value possible in an actual sale of their center. My typical response is: "Something is only worth what someone is willing to pay, and it is not worth a penny less."


While some surgeons believe that I am not saying much when I give that answer, I am actually telling them a lot. At any given moment in time, your ASC has many definitions of "worth," and they all depend on the purpose of the valuation, i.e., which "value world" in which the valuation is taking place. To understand this will require a paradigm shift away from the default way of thinking, as well as a recognition that many value worlds exists. For the purpose of this article, we are only exploring two: FMV and market value.


To make a contrast against the hypothetical world of FMV, market value is the real world value of your surgery center. Market value, simply put, is the highest purchase price and best terms available for this particular surgery center in the open and competitive marketplace.


FMV is a value world defined by federal law and administrative rulings and controlled by the business valuation professionals, whereas the market value world is defined by the actual market place and controlled by the investment bankers (financial intermediaries).


When two value worlds collide

If you want to sell your surgery center for peak price and terms, or to know what the value of your surgery center would be in such a situation, then you must look in the market value world. In essence, you are searching for the most motivated buyer at a specific point in time, which has the compulsion to buy. To get to this, you must conduct a broad auction. Compulsion to engage in a transaction usually works against that party's interests. A "motivated buyer" is likely to pay more than a rational price to acquire an asset. It works every day on eBay.


Additionally, something that's not readily spoken about in the "What is Your ASC Worth" conference sessions is the fact that bona fide offers must be taken into consideration when doing a fair market valuation. In other words, the appraiser has no leeway in allowing the market value to influence the FMV (think rock, paper, scissors…). Thus, you want a well-executed broad auction process before a fair market valuation is done, even if you have a strong desire to sell to a particular buyer.


All the valuation professionals will tell you that a hospital can only pay FMV for a physician's interest in an ASC. This also goes for the ASC management companies that are looking to partner with you and the hospitals. They will hire a valuation professional trained as an accountant or in corporate financial theory to conduct a conservative fair market valuation. While that is true, what they never tell you in these sessions is that a bona fide offer is FMV. In other words, if you have bona fide offers (conservative or not) and present them to the valuation professional, they should use that data in their fair market valuation. The valuation community has defined a hypothetical willing buyer as any likely buyer. Therefore it's to your benefit to hunt down "any" likely buyer … prior to the hospital engaging a fair market valuation professional.


Choosing the right world

So, in practice, it should come as no surprise that these two worlds — the hypothetical world of FMV and the real world of market value — are sometimes in conflict about what a particular ASC is worth. You hear about it all the time: "The hospital thinks my center is worth x, but I know it is worth x squared."


Think about which world to engage with the same way you would think about the services of any other industry. Would you go to a spine surgeon if your ACL was torn? The only way to truly know what your ASC is worth is to shift your paradigm from the hypothetical world of valuation professionals to the real world of investment bankers. FMV likely won't reflect the highest price that could be obtained if you sold your surgery center. On the other hand, market value will reflect that, and it can also influence the FMV. In other words, let the buyers of your surgery center determine the value … not the valuation experts.


Blayne Rush is the president of Ambulatory Alliances (www.AmbulatoryAlliances.com) and is a SEC Registered and FINRA Licensed Investment Banker. He specializes in acquisitions, alliances and access to capital markets for surgery and radiation oncology centers. He can be reach though the Ambulatory Alliances website or by calling (469) 385-7792.

Securities offered through WealthForge, LLC 501 East Franklin ST, STE 118 Richmond, VA 23219 member FINRA, SIPC. Ph (804) 521-4360

Note: This paper is not intended or offered as legal advice. These materials have been prepared for educational and information purposes only. This paper is not legal advice or legal opinions on any specific matters. No person should act or fail to act on any legal matter based on the contents of this paper. This paper was not written by an attorney licensed in your state. Those seeking legal advice or assistance should contact an attorney.


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