Determining and Increasing Your ASC’s Value
There are several common questions that arise when owner operators of ASCs approach the intricate topic of valuations. While we were able to cover various aspects of Fair Market Value (FMV) in our multi-part series on valuations, different facets of increasing value are also important to consider.
Determining Offering Price
As a buyer approaching ASC acquisitions it’s important to keep in mind the fact that you are many times required to follow the FMV standard under the Anti-Kickback Statute, according to Curtis Bernstein, Managing Director of Valuation and Transaction Advisory Services at Altegra Health.
“Buyers, no matter who they are, as long as they’re purchasing the interest from physician-owners where the physician-owners remain within the ASC, are required to follow the FMV standard under the Anti-kickback statute,” he said. “You can’t pay in excess of FMV because that excess may be considered payment for referrals.”
This being established, the question posed then is how buyers actually determine what FMV is.
There are various approaches that can be taken to arrive at FMV. However, at the end of the day, the price is determined based on the expected market rate of return and the expected cash flow of the center, according to Bernstein.
“While we look at historical cash, which is very interesting, projected cash flow is probably most important in determining FMV and what can be done with the center [to increase the cash flow],” he said. “Is the center already at capacity? Is there ability to grow? Where is reimbursement set under current managed care contracts? Is there ability to improve the reimbursement? What types of physicians are operating within the center? What specialties are represented? What are the chances those physicians are going to become employees of a hospital? Is there ownership interest already by the hospital?”
Next, valuators look to consider the rate-of-return. In summary, Bernstein notes that valuation should go hand-in-hand with what is reality for the buyers.
Increasing Value and Offers
According to Bernstein, there are several things that can be done in order to increase the value of an ASC. One place that buyers tend to look first would be multiples of EBITA.
“They may be trailing 12 months EBITDA or projected EBITDA,” he said. “I think one of the best things an ASC can do to increase value is prove that projected EBITDA is going to be significantly different from trailing EBITDA, and why it’s going to be significantly different.”
Furthermore, syndicating the center to additional doctors and locking them into non-competes are also steps that Bernstein says can be taken to increase the value of the ASC in question.
When it comes to increasing the number and value of offers, there are also things that can be proactively done.
Blayne Rush, President of Ambulatory Alliances, LLC, says this part of the selling process starts with the establishment of defined goals for the seller as well as the potential buyer.
“You need to do homework and prepare your center for sale,” he said. “Preparation and organization of your center will show the buyers you are educated and informed. Then you’ll be in a better position to be able to convey the historical and future story of the center. Not doing that will increase the likelihood that the entire story and potential of the center will not be known to the buyers.”
Presenting the right information to buyers who come to the center can help increase the interest of those buyers. The seller also shouldn’t shy away from the idea of hunting down buyers, too.
“You need to go into the marketplace and be proactive rather than reactive,” Rush explained. “A lot of these surgery center companies and buyers will have their development staff come to you and ask if you are interested in selling your center. Even if that happens, you still need to consider multiple other potential buyers as well because you’re going to turn around and leverage them against each other and negotiate them against each other. That will help create competition for your center, help get more offers and help drive up the price you ultimately get for your center.”
Keeping governmental regulations at the forefront of the process is always a good idea. Though at times complicated, it can help you to narrow down what types of offers simply can or cannot be entertained.
One common question in reference to the Anti-kickback Statue is that of whether or not receiving higher offers than FMV would be in violation of said statute.
“It’s important to understand that while the buyers are restricted by the FMV standard under Anti-kickback, that doesn’t mean a buyer has to offer FMV,” Bernstein said. “With regard to surgery centers, you’re dealing with surgeons who refer to the ASC, and ultimately what buyers are trying to ensure is that they’re not paying above FMV because any compensation or remuneration above FMV would be considered a kickback for referrals to the ASC.”
Bernstein notes also that just because a potential buyer has a separate valuation done on your ASC, that doesn’t necessarily mean that the offer they present is the maximum number. In order to ensure that you are receiving the best possible number, it is a good idea to go out and entertain different offers.
“The buyers may not always come back with their highest offer, so you will want to go back to them,” he said. “The buyers should only go up to the point where they feel comfortable that they’re still paying FMV for that ASC and that interest in the ASC.”
All in all, there are many factors that contribute to what the value of your center will be when you sell. However, by being proactive and taking steps to make your ASC as appealing to potential buyers as possible, all while keeping in mind any possible regulatory repercussions, you can position yourself to achieve the best possible price in the end.
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