Becker's ASC Review

30 Executive Briefing: ASC Industry Transaction Trends or all of an ASC owned by physicians, the parties should maintain an FMV analysis related to the lease payment. Depending upon the resulting FMV conclusion, a prospective adjustment to the lease rate may be required, and the impact of the adjustment should be reflected in the business value. Another example of a related-party transaction is the provision of professional services (e.g., billing). If an ASC relied on billing staff from a physician office in the past and was not otherwise charged or charged FMV for the service, then a prospective adjustment would need to be reflected in the valuation of the business. Conclusion Without making any operational or financial changes to an ASC's business, there are several decisions a seller can make during the negotiation of the purchase agreement that directly affect the purchase price. As discussed, sale terms that disadvantage the buyer may result in a lower purchase price for the ASC itself, but the seller may realize the foregone purchase price value through favorable terms for working capital, debt, non-competes, or related party transactions. The overall value realized by the seller is usually the same regardless of whether it is all accounted for in the purchase price or through a combination of other means. n Perceived Value and Longevity for Surgical Specialties and CONs By Todd Mello, Partner and Co-Founder of HealthCare Appraisers, and Nick Newsad, Senior Associate at HealthCare Appraisers M any ASC operators perceive increased economic value for those centers with certificate of need protection, multiple practice specialties, and the participation of orthopedic surgeons. While these factors may indicate relatively higher economic value, they do not necessarily correlate with business longevity. This small difference is somewhat counterintuitive. Rationally, less competitive pressure from new market entrants should result in a significant increase in business longevity. The relatively small difference in average business age indicates that other factors affect the ASC life cycle more than CON protection. However, it should be controlling interest in a single-specialty ASC, 71 percent of the respondents reported prevailing valuation multiples of 5.0 to 6.9 times EBITDA. Based on the survey, the premium for multispecialty ASCs is a full multiple of EBITDA. Further analysis of all 7,045 ASCs that have participated in the Medicare program during the last 27 years indicates that there is not a very evident correlation between the lifespan of single-specialty ASCs versus multispecialty ASCs. The data, in fact, indicates longevity is polarized with single-specialty ASCs and ASCs with six or more specialties staying in business longest. ASCs reporting two to five surgical specialties averaged shorter life cycles than single specialty ASCs. Speculatively, this may demonstrate the merits of the opposing "focus factory" business strategy and the economies scale achieved by the largest centers. Orthopedic Surgery CON State Effect A majority of respondents to HealthCare Appraisers 2013 ASC Valuation Survey indicated they are willing to pay a premium for an ambulatory surgery center ("ASC") with a certificate of need ("CON"). Fifty-seven percent (57 percent) of respondents say they would apply a premium of 0.26 to 0.75 to the typical EBITDA multiple. The popular belief is that CON states afford existing ASCs protection from new competitors because the state approval process is a barrier to entry. This decreases the risk profile for ASCs in CON states and increases their perceived value. While this may indeed be the case, this market protection does not appear to correlate strongly with improved long-term sustainability. Approximately 35 percent of all ASCs identified in Medicare's Provider of Services data file are located in states requiring CON approval for new ASC developments. The average lifespans of ASCs in CON states are only 4.6 percent longer than ASCs located in non-CON states. noted that longevity by itself does not necessarily indicate higher earnings or economic value. Specialty Mix According to HealthCare Appraisers 2013 ASC Valuation Survey, ASC operators tend to place higher economic value on multispecialty ASCs compared to their single-specialty ASC counterparts. When purchasing a controlling interest in a multispecialty ASC, 78 percent of the respondents reported prevailing valuation multiples of 6.0 to 7.9 times EBITDA. When purchasing a Orthopedics was the highest rated specialty in the HealthCare Appraisers 2013 ASC Valuation Survey, with 100 percent of respondents identifying it as a desirable addition to their ASC. Most ASC operators in the United States would probably identify orthopedic surgery as a major success factor in ASCs because orthopedic cases have relatively high contribution margins, and orthopedic surgeons can perform hundreds of outpatient surgeries per year. Conversely, plastic surgery was the lowest rated specialty, with 82 percent of respondents identifying it as an undesirable addition to their ASC. As it relates to cosmetic plastic surgery, this is likely related to

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