DOING BUSINESS ■


■ case mix by specialty;


■ existing payer mix and potential changes; ■ recent and potential regulatory changes; ■


state certificate of need (CON) regu- lations; and


■ current and potential future competition.


The Market Approach When valuing an ASC, the indication of value from the income approach should be supported using the market approach. There are two methods utilized under the market approach when valuing an ASC: the “guideline


public company (GPC)


method” compares the subject ASC to public guideline companies, and the “mergers-and-acquisition (M&A) method” compares the subject ASC to historical privately held ASC transactions. There are usually large differences between the subject ASC


concentration of volume by referring physician;


and the guideline companies and transactions, and valuation adjustments are necessary to help mitigate the impact of these differences. For example, publicly traded companies are significantly larger than a single center and, therefore, an adjustment to the valuation multiple is required upon analysis of factors such as revenue, EBITDA and number of employees. An adjustment to derived valuation multiples will


likely be required


when utilizing the M&A method as well. Adjustments for future growth expectations and identifiable risk factors should also be considered. Subsequent to the development of adjusted valuation multiples, the multiples must be applied to the subject ASC to arrive at an indication of value. Multiples of EBITDA and revenue are commonly used. EBITDA multiples are generally more appropriate than revenue multiples when developing


indications of value for ASCs because EBITDA is a better measure of the economic benefit that a potential investor could expect. Revenue can be a misleading valuation metric due to substantial profit margin variation between companies in the industry.


Value Reconciliation Upon developing multiple indications of value from various methodologies, the values must be reconciled. In most cases, a properly applied discounted cash flow (DCF) analysis is the most reliable indication of value because it is based on the economic benefits a hypo- thetical investor could expect to receive. Although the market approach is useful for reasonableness purposes, it is gen- erally not relied upon as the primary method for the following reasons: ■


EBITDA multiples are a relatively imprecise method of measuring future economic benefits;


■


a significant number of differences usually exist between GPCs and the subject ASC, and adjustment meth- odologies are imprecise; and


■


the underlying transaction data utilized in the M&A approach is often unreliable.


In Conclusion Whether your organization is contem- plating buying or selling interests of an ASC, we suggest obtaining an FMV appraisal of the ASC. An appraisal performed by a professional firm will ensure that all valid methodologies are appropriately applied and that the level of risk is diligently assessed. In an era of high volume ASC transactions, considering and applying the financial statement adjustments and valuation methodologies discussed here is a pru- dent business decision for buyers and/ or sellers of ASCs.


M. Derek Long is a health care consulting manager at PYA, www.pyapc.com. Write him at dlong@pyapc.com.


20 ASC FOCUS JANUARY 2016


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