This document discusses key topics related to ASC valuations: - Benchmarking an ASC's performance against industry metrics is important to understand areas that are strong or need improvement and how this impacts valuation. - The three main valuation methodologies used are income, market, and cost approaches, with income and market most relevant for ASCs. - Common errors in ASC valuations include failing to understand regulations, reimbursement, local market conditions, or making unsupported assumptions about growth, capacity, or normalizing financials. Having a knowledgeable valuation professional is important to avoid errors.

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2. 20 ASC FOCUS JUNE/JULY 2018 |www.ascfocus.org
DOING BUSINESS
Key Trends in ASC Valuations
Benchmark and use common valuation methodologies
BY TAMI M. BOLDER
Since Medicare approved
payments toASCs in 1982,
the number of ASCs has
grown substantially. Fur-
ther, as the number of pro-
cedures that can be performed in an
outpatient setting has grown, the utili-
zation of outpatient surgery centers
has increased in recent years from 50.5
percent of total surgeries in 1990 to
65.9 percent of total surgeries in 2014,
according toVMG Health’s “Multispe-
cialty ASC Study Intellimarker 2017.”
The number of ASC transactions
is rising as hospitals are showing an
increased interest in purchasing ASCs
for strategic reasons and physician
owners are looking to sell due to retire-
ment or other reasons (see article on
page 14 of October 2014 ASC Focus).
Many ASCs are still primarily phy-
sician-owned, however, the number
of investments from other sources is
increasing, according to IBISWorld’s
“Ambulatory Surgery Centers—US
Market Research Report.” Both the
reports state that large ASC opera-
tors and hospitals are becoming more
prevalent as buyers. What is consid-
ered a typical transaction structure has
changed over time and these structures
have increased in complexity.
The increase in transaction activity
in the health care industry has resulted
in increased regulatory scrutiny. Hav-
ing an accurate valuation is criti-
cal for avoiding costly mistakes and
maintaining compliance. In particu-
lar, payments for assets acquired in a
health care transaction need to be care-
fully analyzed to ensure that no value
is attributed to the volume or value
of referrals. Both for-profit and not-
for-profit health care providers must
ensure that any exchanges between
them meet fair market value standards
if they accept payments from govern-
ment programs. Obtaining an inde-
pendent valuation to determine fair
market value will help both parties
in a transaction defend the purchase
price and avoid common pitfalls.
Benchmarking
An important step in determining the
value of an ASC is to review key oper-
ating metrics and see how the subject
ASC compares to industry benchmarks.
Several organizations provide industry
benchmarking surveys. To get a com-
plete picture of an ASC’s financial and
operational performance, consider the
following metrics.
Physician user metrics per physician
■■ Age
■■ Whether the physician is an investor
in the center
■■ Surgical specialty
■■ Stage of practice: new, building phase,
stable, near retirement
The advice and opinions expressed in this column are those of the author and do not represent official Ambulatory Surgery Center Association policy or opinion.
Reprinted with permission from the Ambulatory Surgery Center Association.

3. ASC FOCUS JUNE/JULY 2018 |www.ascfocus.org 21
DOING BUSINESS
Volume/operational metrics
■■ Volume by physician
■■ Volume by specialty
■■ Number of operating rooms
■■ Clinical staff versus administrative staff
Financial metrics
■■ Net revenue by physician
■■ Net revenue by specialty
■■ Average global revenue per case
■■ Payer mix including charges and col-
lections by payer
■■ In-network versus out-of-network
■■ Earnings before interest, taxes, depre-
ciation and amortization (EBITDA)
percent of net revenue
■■ Net working capital percent of
net revenue
■■ Salaries as a percent of net revenue
■■ Medical supplies as a percent of
net revenue
Comparing the subjectASC to indus-
try benchmarks helps determine areas
that are flourishing and areas where the
ASC is falling short. In addition to pro-
viding critical insight to determine value,
benchmarking will assist ASC own-
ers with identifying issues that might be
depressing value. This is valuable infor-
mation that will help with developing
strategies for improving performance.
Valuation Methodologies
Thethreegenerallyacceptedapproaches
for valuing any business are:
Income approach: Value is mea-
sured as the present worth of antici-
pated future net cash flows generated by
an entity. The cash flows are discounted
by a rate that reflects the entity’s risk.
Market approach: Prices are
observed at which entities compa-
rable to the subject entity are bought
and sold. Adjustments are made to the
data to account for operational and
other relevant differences. Value indi-
cations are calculated by applying the
transaction information to the subject
entity data.
Cost approach: This is based on
the assumption that a prudent inves-
tor would pay no more for an asset
than the amount at which it could
be replaced or reproduced. The cost
approach considers reproduction or
replacement cost as an indicator of
value, less depreciation for physical
deterioration and functional or eco-
nomic obsolescence.
Rules of thumb based on multi-
ples of EBITDA or other metrics are
sometimes used to determine a general
range of value. It is, however, generally
not appropriate to rely solely on a rule
of thumb as a valuation method. Rules
of thumb do not consider operational
differences between entities, changes
in economic conditions and impor-
tant qualitative factors such as risk that
would impact an entity’s value.
Appraisers typically use multiple
methodologies when valuing an entity
to get different perspectives of value,
which allow for a more complete pic-
ture of the business. The actual meth-
ods used depends on the specific facts
and circumstances of the entity being
valued. The results are then weighted
to determine a conclusion of value.
ASCs are typically valued under the
income and market approaches. The
cost approach does not appropriately
capture intangible value and is rarely
relied upon for an ASC valuation.
Income Approach
The discounted cash flow (DCF)
method is the primary method for valu-
ing ASCs under an income approach.
In the DCF method, the net cash flows
are forecast for an appropriate period
and then discounted to a present value
using a discount rate that considers the
risk of the entity. Revenue projections
are generally developed on a per-case
basis by specialty. Projected net reve-
nue per case, incorporating anticipated
changes in Medicare pricing, should
also be analyzed by payer.
It is important to bifurcate volume
and reimbursement growth in the pro-
jections. Factors to consider when
developing volume estimates include
the age and stage of practice for the cur-
rent physicians, historical volumes by
physician and by specialty, case mix,
competition, local demand and capac-
ity restraints. With regard to capacity,
the items to consider include: the cur-
rent percentage of capacity, the num-
ber of operating rooms, any facility
expansion plans and any anticipated
changes in the hours of operation.
Factors to consider when estimating
future reimbursement include com-
mercial payer contract renegotiations,
anticipated case mix and payer mix.
Operating expense considerations
generally fall into four main categories:
■■ Staff salaries: These are primarily a
fixed expense. Staff salaries should
be projected based on staff hours per
case. It is important to consider vol-
ume because increases or decreases in
case volume will necessitate changes
in an ASC’s staffing. The staff sal-
aries are considered fixed expenses
and generally increase at inflation-
ary rates.
■■ Management fees: These are com-
monly structured as a percentage of
revenue and typically range from four
percent to six percent of net revenue.
■■ General and administrative expenses:
These expenses will have both fixed
and variable components. Any fixed
expenses are typically estimated to
increase with inflation while vari-
able expenses are generally estimated
based on a percentage of net revenue
or on a per case basis.
■■ Medical supplies: These should be
projected on a per-case basis. To
project medical supplies expense, it
is helpful to analyze the historical
medical supplies per case and then
incorporate any anticipated changes
in volume by specialty.
Normalization adjustments might be
required for some operating expenses.
Normalization adjustments remove the
effect of any non-operating or non-
recurring expenses, which results in a
sustainable level of earnings. Some com-
mon normalization adjustments might
Reprinted with permission from the Ambulatory Surgery Center Association.

4. 22 ASC FOCUS JUNE/JULY 2018 |www.ascfocus.org
DOING BUSINESS
Having a valuation
professional who
understands the nuances
of valuing ASCs and
has a good grasp of the
regulatory environment
is essential for avoiding
the common pitfalls of
ASC valuations.”
—Tami M. Bolder
CBIZ MHM, LLC
relate to litigation settlements and con-
tracts between related parties.
Once the sustainable level of future
cash flow has been determined, the cash
flow is discounted to a present value uti-
lizing a risk-adjusted discount rate. The
risk factors considered when formu-
lating a discount rate include potential
regulatory changes, lack of physician
diversification, financial leverage or
debt, competition and case mix. To the
extent an ASC can lessen the effect of
these risk factors, the value of the ASC
will increase.
Market Approach
The two primary methods under the
market approach are the guideline public
company (GPC) method and the merg-
ers and acquisition (MA) method.
The GPC method employs the use of
ratios developed from the market price
of traded shares of publicly traded com-
panies. The MA method is based on
transactions involving both public and
private companies. Comparability is
typically an issue when using the mar-
ket approach, and it is important that
adjustments are made for any differ-
ences between the subject ASC and the
guideline companies. Under both meth-
ods, valuation multiples are determined
from the market data and applied to the
subject ASC. Multiples of EBITDA are
most common, although in some cases
multiples of revenue may be used as
well. While current market data might
provide good insight into how buy-
ers and sellers are valuing interests in
ASCs, the transaction data found in
many of the available databases might
be incomplete so it might be difficult
to find companies that are sufficiently
comparable to the subject ASC. As a
result, the market approach is generally
used as a supplementary method for
valuing ASCs rather than as the sole or
primary method.
Common Errors in ASC Valuations
There are many pitfalls to be aware of
in ASC valuations. Some of the more
common pitfalls are:
■■ Failure to understand key health care
regulations
■■ Failure to understand ASC reim-
bursement
■■ Failure to understand local market
conditions
■■ Unsupported growth assumptions
■■ Ignoring capacity constraints
■■ Failure to adjust for non-operating/
non-recurring income and expenses
Having a valuation professional who
understands the nuances of valuingASCs
and has a good grasp of the regulatory
environment is essential for avoiding
these common pitfalls.
Conclusion
Any ASC considering a transaction
will benefit from obtaining a fair mar-
ket value appraisal. As ASCs continue
to grow in popularity, there will be a
continued interest in investments by
both strategic and financial buyers. A
valuation prepared by a credentialed
valuation specialist will help buyers
and sellers of ASCs withstand regula-
tory scrutiny.
Tami M. Bolder leads the Valuation
LitigationAdvisorypracticefortheNortheast
Ohio region of CBIZ MHM, LLC. Write her at
tmbolder@cbiz.com.
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Reprinted with permission from the Ambulatory Surgery Center Association.