Becker's ASC Review

19 Executive Briefing: ASC Valuation Preparation Sponsored by: www.HealthCareAppraisers.com | info@hcfmv.com | (561) 330-3488 DELRAY BEACH | DENVER | DALLAS | CHICAGO | PHILADELPHIA W hat's it really worth? That's the question that ASC own- ers and operators commonly ask. While some ASCs may have valuation formulas set forth within their gov- erning documents (e.g. a 3.5 times EBITDA multiple time trail- ing 12 month ("TTM") EBITDA in connection with a physician buy out), these formulas may not always produce a representa- tive value for your ASC. Some primary reasons for this include the following: 1. TTM EBITDA may not be representative of go-for- ward EBITDA. Consider a scenario in which as of the date of "valuation" you have knowledge that you are los- ing two key producers. Reliance on TTM EBITDA would overstate value. Similarly TTM EBITDA may contain cer- tain other atypical expenses, which are not expected go- ing forward (e.g. excessive legal fees associated with a shareholder dispute). 2. Multiples in the marketplace may have changed since the documents were drafted. 3. Expected growth trajectory may not lend itself to the use of a multiple. Assume you have a fairly new center, and center is expected to grow by 35 percent in the next 12 months, 20 percent the year after, and 15 percent the year after before settling into a more long-term sustain- able growth rate. Use of a multiple on a TTM earnings stream will understate value. 4. Center is fairly new and/or center is expected to be marginally profitable or unprofitable. Use of a multiple may not be representative of FMV as it may overstate or understate value. If these conditions are present, it is likely appropriate to request a valuation to be performed by a qualified appraiser with spe- cific experience in healthcare and ASCs. In preparation for this process you can expect the following: 1. To execute a letter of engagement which outlines the scope of the project, timing and fees. 2. To receive a comprehensive data request which will need to be completed and provided to the valuator, as further described below. 3. To host an on-site diligence meeting aimed at allowing the valuator to ask questions arising from a review of the data provided and designed to allow the valuator to de- velop an understanding of the strengths, weaknesses, opportunities and threats facing the center. Meetings can generally be handled in a single (half) day, and the valuator typically will want to tour the facility and meet with the administrator and key physician business and clinical leaders. 4. To the extent you have not provided one, to review the projection developed by the valuator for the center, as fur- ther discussed below. 5. Prior to finalization of the appraisal, to receive a substan- tially complete draft of the appraisal for factual review. 6. Assuming data is timely provided, you can expect the en- tire process to last anywhere from four to six weeks, on average. As set forth above, you will need to respond to and complete a comprehensive data request. Typical items which will be re- quested include but are not limited to the following: 1. Purpose of the valuation – Typical reasons include physi- cian buy-in our buy-out, sale of all or some of center to a third party manager of hospital 2. Size of the interest to be valued (i.e., this will have implica- tions on discounts to be applied — or not — to the interest) 3. History and description of center 4. Governing documents (e.g. Operating Agreement) 5. Detailed financial statements (i.e., income statements and balance sheets) for the past three to five years 6. Detailed operational data including but not limited to case mix, payer mix and case volume, charges and collec- tions by physician for the past three to five years. 7. Detailed fixed asset listing (more appropriate for centers which are unprofitable or marginally profitable) Preparing Your ASC for a Valuation By Todd J. Mello, ASA, CVA, MBA, Partner at HealthCare Appraisers "While the valuation process may seem foreign and, at times, daunting, most ASCs benefit from the process as much as learning the answer to the question 'What's it really worth?'" — Todd Mello of HealthCare Appraisers

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