How is pricing determined?

There are several key elements that contribute to the pricing of a center. The pricing is greatly dependent upon the strengths and risks of the ASC being bought.

  • Is the center located in a Certificate of Need (CON) state? This gives you more control over the market (and greater value) compared to a non-CON state where anyone can set up shop across the street. States with tough CON laws make it more difficult to open new ASCs and thus raise the value of existing ASCs.
  • What are the payor contracts like? The stronger the in-network contracts the better. If you have long-term third party contracts that have solid reimbursements, then the investor sees this as low risk to their reimbursement vs. many buyers who view out-of-network centers as having significantly more risk.
  • Physicians – do you have a significant number of physicians and good physician mix and cases? Also, is there potential for growth through syndication (recruiting more physicians and cases)? If you are reliant upon only a few doctors and their cases, then this is viewed with a great deal of risk.
  • How many centers are the physician investors invested in? If the physicians are only invested in this ASC and have strong non-compete clauses the buyers will see this as a strength vs if they are invested in multiple centers and do not have non-compete, they buyers will see this as very risky and the buyer pool will be low if any.
  • Assets – will the buyer have to invest in new equipment or not?
  • Amount of interest sold –  is it minority or majority interest?
  • Number of ASCs in the area – if there are too many ASCs in the area, a center up for sale would have a lower value.
  • Nearby hospital buying up ASCs – if a hospital in the area is buying up ASCs, usually in partnership with physicians, this will take volume away from unaligned ASCs and thus lower their value but if there are Hospitals in the area that have a desire for a surgery center and you are an attractive option for them that could increase the buyer pool thus the price
  • Managed care contracts – ASCs that have strong contracts with insurers are at the high end, while out-of-network ASCs are seen as riskier.
  • Financial markets – the more available the credit and equity markets are, the higher the purchase prices are. This is because new buyers come into the market, which increase the buyer pool which drive down the investors’ required return on invest. In other words, the buyer does not need to make as much money on the investment to justify the purchase. Think of it in terms of residential home prices: when everyone with a pulse could get a loan, the higher the houses prices were.

Those are the science answers behind how prices are determined, but some of the least spoken about questions are:

  • Who is the most motivated to purchase your surgery center at that point in time?
  • How many people are bidding on your center?
  • Who has money to spend?
  • Who has use it or lose it money? Some buyers are required to deploy their money by a certain time or they will have to return it.
  • Which buyer is hungry for a deal?
  • Who is trying to show growth on their balance sheet in preparing to go public?
  • How well do you understand the value drivers of your center and the ability to mitigate any perceived risk? For example, we have represented two centers where one had one doc and the EBITDA was over $1 million with solid growth in both the third party payers and the syndication at 100% of Medicare, and another that had two docs and a center with similar EBITDA. We offered insurance products in the deal to mitigate the risk, which in turn allowed the buyers to get comfortable with moving forward with the deal.

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Category: Valuating My ASC

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