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Maximizing the Value of Your Surgery Center in 2018

Some physician-owners of surgery centers wonder: Why do some centers command values well above other similar centers?  How can I maximize the value of my center?

Many physician-owners of ASCs have considered selling an interest to an ASC management company and/or hospital but their centers may not be prepared to attract the highest possible offers.  The information below is intended to assist ASC owners in preparing their center to attract the highest offers from the best strategic partners.

Surgery centers are in demand – this is a “seller’s market”.  Your center is probably worth more than you think it is, but to realize maximum value the center must be properly prepared so that it represents exceptional value to the buyers.

What is the future of outpatient (O/P) surgery and how will this impact the value of ASCs?  Demand for O/P surgery is expected to skyrocket over the next decade fueled by cost containment, convenience and clinical advancements.  This is expected to result in an exponential growth of case volumes.  Centers can prepare for this growth by aligning with strategic partners that bring resources to capture this growth and profit from it.  So, for many owners, the goals are to prepare their ASC to represent maximum value and to partner with an entity that will ensure that their center will benefit from future growth in O/P surgery.

Why are more hospitals interested in acquiring ASCs and how will this impact the value of independent ASCs?  Hospitals have high overhead and are under pressure from payors to offer greater value.  The easiest and fastest way for a hospital to provide greater value is to acquire existing O/P centers that have a lower cost structure.  Most ASC fees are about 50% of HOPD fees and payors are directing their customers to lower cost facilities.  Hospitals must acquire or build cost-efficient ASCs so that they can compete.  With more qualified buyers, the value of ASCs increases.  Increased demand for centers is why we are seeing higher multiples than ever before being offered for ASCs.

What can ASC owners do to increase profitability and the value of their ASC?  The fastest way to increase the value of a center is to identify and recruit additional users, to increase the number and complexity of procedures, and to quantify the additional revenue that these procedures will generate.  Most of this projected additional revenue will be reflected on the net income line as few additional expenses will likely be incurred.  This will not have an immediate impact on profits but it will reflect future profitability and will have an impact on the multiples offered, thus increasing the value of the center, often significantly.

How can ASC owners use competitive bidding to maximize the value of their ASC?  With increasing demand for O/P surgery, and hospitals and ASC management companies seeking partnerships with ASCs, it makes sense for ASC owners to solicit competitive bids from entities that are interested in partnering with their center.  Typically, hospitals use a discounted cash flow analysis to value a center while the ASC management companies use a multiple of trailing 12-month earnings, with no discount.  The ASC management company’s valuation approach almost always places a higher value on an ASC than the hospital approach.  Even if the hospital is your first choice as a strategic partner, it is good practice to obtain competitive bids from several of the leading ASC management companies in addition to the hospital.  The competitive offers reflect “fair market value”.  This usually results in higher offers and a choice of strategic partners.  Often a 3-way deal (physicians, hospital, ASC management company) is the end result, with the physicians as the largest shareholder.  To increase the value further, a second round of bidding will enable the sellers to bring their preferred strategic partner’s offer up to the price of the highest bidder.

How can ASC owners maximize the value of their ASC/MOB real estate?  Physician-owners often don’t realize how valuable their ASC/MOB real estate has become.  It is often advantageous from a business perspective to sell an asset once it has fully appreciated and is returning a low ROI, such as is typical with medical real estate.  If the physicians own their ASC/MOB real estate they have an opportunity to sell and leaseback the property with no change in rent and no personal guarantees of the long-term lease, at a very attractive profit.  For example, a 10,000 sf ASC paying $360,000 in annual rent would have a sale and leaseback value today of over $5 million.  Most sale and leaseback transactions attract multiple competitive offers within 30 days and a deal can close in as little as 60 days.  A 1031 exchange will shelter the sellers from capital gains taxes.

Jonathan C. Vick, the founder and President of ASCs Inc., has assisted in development, merger, and strategic acquisition transactions for over 500 physician-owned ambulatory surgery (ASCs), endoscopy centers (ECs) and surgical hospitals since 1984. He advises on ASC and EC sales, real estate sales and leasebacks, valuations, and mergers & acquisitions and can be reached at 760-751-0250 or jonvick@ascs-inc.com.

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