DOING BUSINESS


Volume/operational metrics ■■


Volume by physician ■■ Volume by specialty ■■


Financial metrics ■■


Number of operating rooms ■■ Clinical staff versus administrative staff


Net revenue by physician ■■ Net revenue by specialty


■■ Average global revenue per case ■■


Payer mix including charges and col- lections by payer


■■ In-network versus out-of-network ■■


Earnings before interest, taxes, depre- ciation and amortization (EBITDA) percent of net revenue


■■


Net working capital percent of net revenue


■■ Salaries as a percent of net revenue ■■


Medical supplies as a percent of net revenue


Comparing the subject ASC to indus- try benchmarks helps determine areas that are flourishing and areas where the ASC is falling short. In addition to pro- viding critical insight to determine value, benchmarking will assist ASC own- ers with identifying issues that might be depressing value. This is valuable infor- mation that will help with developing strategies for improving performance.


Valuation Methodologies The three generally accepted approaches for valuing any business are: Income approach: Value is mea- sured as the present worth of antici- pated future net cash flows generated by an entity. The cash flows are discounted by a rate that reflects the entity’s risk. Market approach: Prices are


observed at which entities compa- rable to the subject entity are bought and sold. Adjustments are made to the data to account for operational and other relevant differences. Value indi- cations are calculated by applying the transaction information to the subject entity data. Cost approach: This is based on


the assumption that a prudent inves- tor would pay no more for an asset


than the amount at which it could be replaced or reproduced. The cost approach considers reproduction or replacement cost as an indicator of value, less depreciation for physical deterioration and functional or eco- nomic obsolescence.


Rules of thumb based on multi- ples of EBITDA or other metrics are sometimes used to determine a general range of value. It is, however, generally not appropriate to rely solely on a rule of thumb as a valuation method. Rules of thumb do not consider operational differences between entities, changes in economic conditions and impor- tant qualitative factors such as risk that would impact an entity’s value. Appraisers typically use multiple methodologies when valuing an entity to get different perspectives of value, which allow for a more complete pic- ture of the business. The actual meth- ods used depends on the specific facts and circumstances of the entity being valued. The results are then weighted to determine a conclusion of value. ASCs are typically valued under the income and market approaches. The cost approach does not appropriately capture intangible value and is rarely relied upon for an ASC valuation.


Income Approach


The discounted cash flow (DCF) method is the primary method for valu- ing ASCs under an income approach. In the DCF method, the net cash flows are forecast for an appropriate period and then discounted to a present value using a discount rate that considers the risk of the entity. Revenue projections are generally developed on a per-case basis by specialty. Projected net reve- nue per case, incorporating anticipated changes in Medicare pricing, should also be analyzed by payer. It is important to bifurcate volume


and reimbursement growth in the pro- jections. Factors to consider when developing volume estimates include the age and stage of practice for the cur-


rent physicians, historical volumes by physician and by specialty, case mix, competition, local demand and capac- ity restraints. With regard to capacity, the items to consider include: the cur- rent percentage of capacity, the num- ber of operating rooms, any facility expansion plans and any anticipated changes in the hours of operation. Factors to consider when estimating future reimbursement include com- mercial payer contract renegotiations, anticipated case mix and payer mix. Operating


expense considerations


generally fall into four main categories: ■■


Staff salaries: These are primarily a fixed expense. Staff salaries should be projected based on staff hours per case. It is important to consider vol- ume because increases or decreases in case volume will necessitate changes in an ASC’s staffing. The staff sal- aries are considered fixed expenses and generally increase at inflation- ary rates.


■■


Management fees: These are com- monly structured as a percentage of revenue and typically range from four percent to six percent of net revenue.


■■


General and administrative expenses: These expenses will have both fixed and variable components. Any fixed expenses are typically estimated to increase with inflation while vari- able expenses are generally estimated based on a percentage of net revenue or on a per case basis.


■■


Medical supplies: These should be projected on a per-case basis. To project medical supplies expense, it is helpful to analyze the historical medical supplies per case and then incorporate any anticipated changes in volume by specialty.


Normalization adjustments might be required for some operating expenses. Normalization adjustments remove the effect of any non-operating or non- recurring expenses, which results in a sustainable level of earnings. Some com- mon normalization adjustments might


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