Debunking 3 ASC valuation myths

Many factors affect ASC valuation, and centers that aren't on top of the latest advice can stand to lose out on millions of dollars.

Healthcare Appraisers' Hunter Outcalt debunked some common valuation myths at Becker's ASC 25th Annual Meeting: The Business and Operations of ASCs, Oct. 18 in Chicago.

Here are three myths:

1. Myth: Valuation multiples always paint a complete picture. "The problem with just throwing out valuation multiples is that if everyone says controlling interest in a multispecialty surgery center should be seven times EBITDA, [all you have to do is look at] three different surgery centers in different life cycles of their business that would all command seven times' earnings. If I'm a buyer, I'm not going to pay seven times on a declining center … The point is there's more that goes into [valuation] than just valuation ranges. There's growth considerations and risk considerations as well."

2. Myth: You should always use income-based valuation at center inception. Typically, you use a cost approach [when starting a center]. … For the most part, if you're incurring the cost of building a new center, purchasing new equipment and taking out loans, you should really look at it from a cost approach.

There's a lot of speculation on those future projections without having some kind of substantiation on what's happened in the past. It's a lot safer to start out with a cost approach and see where it ramps up. It can ramp up in six months. It can ramp up in two years. You just really don't know. That's not to say that it couldn't ramp up in six months. You could've priced everything out six months ago and six months later it may be time to switch to an income approach. You have to watch how long you maintain those values.

3. Myth: You shouldn't vary share prices for different physicians. There are cases where you [vary the price at which physicians can buy into your center], but you have to be careful. On Jan. 1, you don't want to sell shares for $1,000 a share, then on Jan. 2, there's a new doctor that is going to bring 1,000 cases, so he could buy a share at $500 a share — or there's a new doctor that won't bring as many, so you charge him $1,500 a share. You have to be careful about that. How long is long enough? We syndicated shares on Jan. 1, how long do we have to wait before getting a new valuation? How long can we use the old price? … You have to be careful. It's a scenario-by-scenario situation.

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