Becker's ASC Review

33 Executive briefing: Optimizing ASC Value Pre-Transaction Sponsored by O ne question that commonly arises is: "What can I do in advance of a transaction to enhance my center's value?" Accordingly, and to the extent that you are one of those centers holding out from an affiliation or transaction, this article will provide helpful tips, which if implemented now, can enhance a cen- ter's value down the road. As the article will describe, these steps will take time to accomplish, so better to start sooner than later. In summary, and in my experience, some key steps include the following: 1. Do your homework — plan carefully before opening your center; 2. Don't attempt to be everything to everybody — develop core competencies; 3. Don't be shortsighted with equity — (continue to) offer equi- ty to those active, quality surgeons who will enhance value and extend center lifecycle; 4. Hire competent management; and 5. Make customer service a priority and continually solicit feedback and measure performance. 1. Do your homework carefully before you decide to build Many centers fail even before they open. That's typically the case when centers are overbuilt. Overbuilding leads to excessive fixed costs, heavier debt burdens and more pressure to achieve bud- geted case volume estimates. If you aren't already aware, ASCs are fixed-cost intensive. Once fixed costs are covered, incremen- tal case volume becomes significantly more profitable. Typically, adequate case volume is required to achieve this. Ac- cordingly, in your planning stages, take MD case estimates with a degree of conservatism. For example, if only 50 percent of expected volume is achieved, what happens to projected earn- ings and the center's ability to make debt service payments? If you are not too comfortable with financial modeling and the selection of the appropriate level of debt to incur, I would highly recommend engaging the assistance of a qualified, knowledge- able consultant. 2. Don't attempt to be everything to everyone While multispecialty centers generally attract higher valuation multiples than their single-specialty cousins (remember — just like your financial planner tells you, diversification is prudent), there is a risk in trying to accommodate too many specialties; hospitals routinely make this mistake in developing outpatient centers. The reason relates in part to higher fixed costs, as set forth above, and also to lack of ability to gain neces- sary efficiencies. With respect to fixed costs, I have seen too many centers over the years pur- chase excessive equipment in an at- tempt to attract each and every avail- able surgeon, regardless of whether it makes financial sense to do so. For ex- ample, it likely doesn't make economic sense to purchase a $500,000 piece of equipment for a surgeon who only does a handful of cases per year. Similarly, room turnover times are materially adversely affected when trying to accommodate a wide variety of specialties. Some of the more efficient orthopedic centers I have seen set up their ORs to do all left knees in one room and "rights" in another to minimize equipment relocation. All other things equal, speeding up room turnover times allows a center to perform more cases in a given day. 3. Don't be short-sighted and stingy with equity While a center needs to be careful in admitting a new owner sur- geon, I have seen too many centers who fail over time because they refuse to offer new surgeons the ability to enjoy the same ownership rights and privileges which the incumbents enjoy. All other things being equal, centers where the bulk of the cases are performed by the owners are less risky than those who depend on the on-going kindness of non-owning surgeons to continue to bring cases. It's not rocket science. Since valuation is a forward-looking exercise, existing owners need to continue to monitor opportunities to "lock in" case volume over time. If a qualified, active surgeon is not given the opportu- nity, he (she) will leave and take their cases with them. Eventually, the existing owners slow down, and in the absence of new talent, revenue and earnings will trail off. The highest multiples are paid for those centers which exhibit the strongest likelihood of growth. A center cannot grow over time if it fails to extend its life cycle by adding additional surgeon owners. 4. Hire competent management The smartest people I have met in business generally know where their strengths lie and recognize their limitations. While physi- cians are very intelligent, they are not often afforded the neces- sary training and experience in business. As set forth above, poor Preparing Your ASC for a Transaction – Valuation 101 By Todd J. Mello, ASA, CVA, MBA, Partner and Co-Founder of HealthCare Appraisers www.HealthCareAppraisers.com | info@hcfmv.com | (561) 330-3488 DELRAY BEACH | DENVER | DALLAS | CHICAGO | PHILADELPHIA Todd Mello

• Cover