Buyers More Prudent in ASC Acquisitions, But Pricing Remains High for the Right Opportunity

Pricing trends in ASC sales differ depending upon the ASC’s individual characteristics; and yet overall, ASCs are experiencing the same favorable pricing they have seen for years. In particular, the lowerrisk, more desirable ASCs have seen an uptick in their prices.

"The most desirable, and therefore highest priced, ASCs are those containing the greatest potential for future earnings and growth with low risk factors," says Kenneth Hancock, president and chief development officer of Meridian Surgical Partners "These ASCs are approaching sales prices with multiples as high the upper seven times earnings before interest, taxes, depreciation and amortization (EBITDA)."

Jon Vick, president of ASCs Inc., agrees.

"Majority interests in centers with solid, definable growth potential and projections, that were selling at six to seven times EBITDA a couple of years ago, are now selling as high as seven or almost eight times EBITDA, less long-term debt, plus cash," he says.

Michael Weaver, vice president of development at Symbion, has witnessed a few values rise as high as the upper seven-times EBITDA, but says it is an exception and not a rule. He generally sees valuations remaining at a steady rate over the last two to three years. "In cases where ASCs sell north of seven times EBITDA, it is difficult to support an accretive valuation for the buyer," he says.

Prices for desirable ASCs have increased, in large part, due to competition. Recently, momentum in the marketplace has shifted from corporate buyers to ASC sellers.

"With over 30 companies competing for a limited number of good quality ASCs with decent growth potential, sellers are in a position to negotiate higher prices," says Mr. Vick. "There are now several buyers for each ASC and sellers can be choosier about their deal terms." For example, he says ASCs that would have received a corporate bid of four to five times EBITDA for selling a minority interest two years ago can now negotiate that price up to five to six times EBITDA.

While Mr. Weaver has not seen a complete shift in the marketplace, he has seen changes in larger acquisitions.

"Due to the high prices of acquiring larger ASCs combined with the recent credit crunch and some consolidation in the market, there has been a reduction of companies with the ability to acquire bigger ASCs," Mr. Weaver says. In addition, because of the difficulty in securing capital on credit, corporate buyers are making much more conservative, disciplined and careful ASC purchases than in the past, he says.

Buyers weigh numerous considerations In making more prudent purchases, buyers will evaluate several factors. For example, instead of simply basing valuation on an ASC’s historical 12 month EBITDA, buyers are also assessing future earning potential.

"Buyers may consider a blended formula where they look historically for earnings and forward in regards to potential new contracting opportunities and physician syndication," says Mr. Weaver. He adds that these new potential opportunities may result in supporting an improved valuation.

David Hall, chairman of Titan Health Corp., agrees that profitability must take into account the number of prospective physicians who can be recruited to invest in the ASC.

"Without first-rate physicians to bring into the ASC, there will be no case load and perhaps no case mix increases," Mr. Hall says.

A lack of available physicians can have negative implications, agrees Brett Brodnax, executive vice president and chief development officer of United Surgical Partners International.

"Without new physicians to bring into the ASC, there will be reduced case growth expectations and consequently a discount on the future earnings projections" says Mr. Brodnax.

There are other evaluative factors besides earnings that are also considered. Traditionally, buyers have focused primarily on an ASC’s payor mix. These days, buyers are looking not only at the ASC’s payor mix, but also its case mix, Mr. Hall says. Recent CMS changes to Medicare reimbursements resulted in decreases in reimbursements for GI and pain procedures.

There may be additional revenue losses in other procedures, as reimbursements decrease and costs increase, says Mr. Vick. An ASC with a diversified case mix (or with the potential for one) that includes more highly reimbursed specialties such as orthopedics, bariatric, hernia and spine, will be more likely to offset reimbursement losses.

"Only by evaluating an ASC’s present and future case mix will a buyer be able to assess its growth and earnings potential," he says. Mr. Vick generally likes to see a future case (and EBITDA) growth potential of at least 10-20 percent a year.

Buyers watch for challenges
In looking for ASCs with solid growth and earning potential, buyers examine competitive and reimbursement hurdles that may exist. One such hurdle is out-of-network reimbursement.

"As payors continue to crack down on out-of-network reimbursement, ASCs with a large percentage of these cases will face decreases in revenue which can harm their growth and earning potential," says Mr. Hancock. "For this reason we are only interested in ASCs with less than 15-20 percent of these cases," he adds

Mr. Weaver agrees with this percentage benchmark but, in these cases, he also evaluates the ASC’s means for making up the potential lost revenue.

A second hurdle is the competitive landscape, says Mr. Brodnax.

"An ASC in a Certificate-of-Need state has fewer competitive obstacles because the state actively controls the number of ASCs and other healthcare facilities that can be developed," he says.

Lastly, buyers are not interested in well-established, fully-utilized ASCs. Instead, they are interested in an ASC that has the potential to expand its business and to physically expand its facility.

"An ASC that is 100 percent utilized and is very profitable but not expandable, will not be valued very highly if there is no growth potential," says Mr. Vick. "This is a change from just a couple of years ago when some companies were simply seeking high cash flow." To that end, buyers are evaluating whether an ASC is physically capable of adding more procedures and one or more operating rooms and additional recovery beds.

Ms. Kulvin ( is a freelance writer based out of Surfside, Fla.

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