DOING BUSINESS
What’s My Center Worth? A practical guide to understanding ASC valuations BY M. DEREK LONG
ASC transactions con- tinue to be a hot trend in the health care mergers- and-acquisition arena for several
strategic
reasons.
While an organization’s motivation for buying or selling interests in an ASC will vary, common catalysts remain the same: i) a hospital’s desire to purchase an ownership interest in a local ASC, ii) a large, for-profit organization’s desire to purchase a majority interest in an ASC as part of its strategic plan, iii) a large, for-profit organization’s desire to purchase a minority interest in an ASC as part of its strategic plan, and iv) a physician’s desire to sell a minority interest due to retirement or relocation. Following an organization’s decision to purchase or sell an ownership interest in an ASC, obtaining a fair market value (FMV) appraisal of the ASC is a logical next step. Most health care transactions are consummated at FMV to ensure regulatory compliance. While simply applying a multiple of revenue or earn- ings before interest, taxes, depreciation, and amortization (EBITDA) might be an efficient and time-saving method for estimating the purchase price, a sound fair market value appraisal by an inde- pendent third-party valuation firm will address many quantitative—i.e., nor- malization adjustments to revenue and/ or expenses—and qualitative—i.e., the ASC’s risk profile—factors that should be considered and accounted for when appraising a business. It is advantageous to both parties that an independent valuation is obtained to defend the parties’ motives and purchase price.
The Valuation Process Three approaches are commonly used to value any asset. The “asset (cost) approach” is based on the anticipated
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cost to recreate, replace or replicate the asset; the “income approach” is based on the economic benefits anticipated to be derived from the asset; and the “market approach” is based on transaction data involving similar assets or services. Additionally, there are multiple
methodologies that fall under one or more of the above valuation approaches. The appropriateness of utilizing one or more valuation methodologies will depend upon the specific facts and circumstances of the asset being val- ued. However, multiple methodologies should be utilized to the extent pos- sible and the results reconciled and/or weighted for purposes of determining the final conclusion of value. ASCs are, typically, valued using the income approach and the market approach. The cost approach is not typically utilized in valuing ASCs given that an ASC has a significant portion of intangible value that will not be captured in the value of the ASC’s tangible assets. As previously mentioned, a simplified way to think
about the valuation of an ASC is as a multiple of EBITDA. Non-controlling interests in
ASCs, typically, are
appraised at three to five times EBITDA, while controlling interests, typically, are appraised at five to eight times, depending on the growth prospects and risk factors associated with a specific center.
The Income Approach Operating Expense Adjustments Certain operating expenses on an ASC’s income statement need to be ana- lyzed for potential normalizing adjust- ments before projecting future operat- ing expenses. Any adjustments made to operating expenses must be applicable to any potential buyer (i.e., a specific buyer cannot be taken into consider- ation in an FMV context). Some typical operating expense adjustments include, but are not limited to: ■
Facility rent expense—The rental rate per square foot for an ASC may not be consistent with local market rates. Research should be performed and normalization adjustments
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