What are industry value drivers?

When we discuss value drivers we are referring to them from the buyer’s prospective. The value drivers in large part are within the pricing criteria and knowing these will help you make adjustments to your center if possible to get the best possible value for your center. So what are the factors that most significantly affect the value of your ASC to an outside investor like a corporate partner or management company?

  • The stability of the center’s cash flow
  • The growth prospects of the center
  • Its underlying operations
  • Any unique differentiators.

Valuation multiples are determined by the outlook for future performance and therefore are extremely sensitive to growth prospects and risk factors. There are four main pricing criteria that have either a negative or positive impact on price.

1. Competition/barriers to entry. The multiple will decrease if there are few barriers to entry for other ASCs in the area, if there are several competing partnerships within your center or if physicians have ownership in multiple facilities. If it’s unlikely that you’ll experience success recruiting new partners or users, the growth prospects are diminished, driving a discount in ambulatory centers sale valuation of the business. The multiple will increase if there are significant barriers to entry for other ASCs (such as requiring a certificate of need), if there are few competing partnerships or if physicians do not have investment interests outside of your ASC. These factors create multiple recruiting/growth opportunities for the partnership and receive credit in valuation.

2. Reimbursement risk. The multiple will decrease if your center has high out-of-network revenue, if it has a specialty concentration facing significant Medicare changes or if there is other exposure, such as workers’ compensation reform. Out-of-network payments can boost net collections, but centers with high levels of out-of-network payments are generating a level of cash that some buyers will see as unsustainable in the future. The historical trends of the business are important, but what you are really buying into is the future cash flow. If you expect that to decline, you’re going to discount its value. The multiple will increase if your center has contracted with major payors, if your center’s specialty is in a “positive” Medicare concentration (such as ENT or orthopedics) or if there are no other exposures.

3. Partnership profile. The multiple will decrease if a significant number of your physician partners are nearing retirement and your center has no contingency plan to replace them. Another factor is partner concentration. Having too few partners sharing sale proceeds may create incentive for them to slow down or eliminate their surgical case production. Also, having a dominant partner creates risk that there is too much reliance on a single individual.

4. Growth prospects. The multiple will decrease if there is limited growth opportunity from existing partners, if there are few recruiting prospects or if there are capacity concerns. The multiple will increase if your center consists of partners with growing practices, if there are excellent recruiting prospects, capacity to grow and a diverse case mix.

Buyers consider two types of growth when making these determinations — organic and external. Organic growth depends upon the maturity of the individual partner’s practices. Each partner is interviewed individually to determine their objectives and ability to bring additional surgical cases to the ASC. External growth is analyzed based on the probability of recruiting new physicians to the partnership.

Uniqueness or differentiators has not been spoken about very often, but this is something that specific buyers value.

The final factors that may influence value include the age of current physicians and commitment from selling physicians. Buyers are often worried that they’ll cut a big check to the physicians for the center and as soon as the transaction is final, the surgeons will in-house retire or spend more time on the golf course than in the operating room. You need to evaluate this with your current surgeons and be prepared to overcome this. This can be done with a succession plan in place, with strong non-competitive agreements, etc.

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