How Much Is Your Surgery Center Really Worth?

Find out what influences the value of your ASC and how you can increase its worth to potential buyers.

By Virginia Pickles, Contributing Editor

We asked several ASC industry experts how you can determine the value of your surgery center, and they all agreed: It depends. A simple method of calculating your ASC’s value is to add your net income to the value of your tangible assets and then subtract your liabilities, but if you’re interested in selling your surgery center, the term “value” takes on a whole new meaning and the calculations become more complex and less defined.

Certainly, the profitability of your center is a key driver, but other factors come into play. Who are your potential buyers, and what are you selling? Is your goal to recruit new surgeons who will hold minority interests, or are you looking to sell a majority stake? Do you want to partner with a local hospital or attract an ASC management company? What is your time line? The answers to these questions will lead you toward a valuation starting point.

What Are You Selling?

Rarely are ASCs sold in their entirety. An exception would be a retiring ophthalmologist who decides to sell the entire enterprise — clinic, optical dispensary and surgery center — to another doctor who will take on the operation of all three. It’s more likely that an individual surgeon or a corporate entity will buy an interest in your surgery center, and the value of it will be affected by whether they’re buying minority stake or a controlling interest.

“Fifty-one percent becomes a critical number,” says Stephen C. Sheppard, a managing principal at Medical Consulting Group in Springfield, Mo. “With a 51% interest, you effectively control the governance of the business and its direction going forward to ensure that it remains successful and profitable. That’s why a controlling interest is valued differently than a minority interest.”

The basis for valuation calculations is a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA), a metric that’s commonly used to measure profitability. “A controlling interest is valued at a higher multiple of EBITDA than a minority interest,” Sheppard says. “In today’s market, depending on the facts and circumstances associated with a particular ASC, the multiple for a controlling interest could range from 6 to 8 times EBITDA.” For example, if the EBITDA of your surgery center is $100,000 a year and you’re selling a controlling interest, a buyer would likely pay between $600,000 and $800,000 multiplied by the percentage being purchased. For a 51% interest, the price tag would be between $306,000 and $408,000.

“If you’re selling less than 50% — and these are the more common transactions — the value would be a lower multiple of EBITDA,” Sheppard says. Our experts estimated the multiple for less than a 50% share could range from 2.5 to 4 times EBITDA. “Obviously, these ranges can fluctuate as market conditions change,” Sheppard notes.

According to Ronald Blair, president of Surgery Center Services of America, an ASC development company in Mesa, Ariz., the practical cap his company places on valuations for physician buy-ins of existing surgery centers is the cost of building a new ASC. “Let’s say a doctor can build an ASC for $1 million. That’s the cap,” he says. “If you’re asking more than $500,000 for a half interest in your surgery center, it would be less expensive for the doctor to build his own ASC. The only advantage to buying an existing facility would be that it’s already up and running, so the doctor could start taking cases right away, as opposed to waiting 8 to 10 months for his own center to be built.”

Another factor to consider in these calculations is long-term debt. “A purchaser is effectively buying not just assets and future income stream but also his share of long-term debt,” says Sheppard. “As an example, let’s assume a buyer is purchasing 100% of your ASC, including a $200,000 bank loan. The gross valuation of your center may be $700,000, but the buyer will write a check for $500,000, because he’s assuming responsibility for the loan. In other words, net proceeds to the seller would be the valuation at the agreed-upon multiple minus any long-term debt.”

Closely aligned with the percentage of an ASC that’s being sold — and another key factor that influences its value in the marketplace — is the identity of the potential buyer.

Who’s Your Buyer?

Potential buyers can be divided into two cohorts, according to John Pinto, president of J. Pinto & Associates Inc., an ophthalmology practice management firm based in San Diego (pintoinc.com). “The first cohort encompasses doctor-to-doctor transactions, which may involve admitting a new doctor into a syndicated center or selling a center owned by one doctor to a new practice,” he explains. “The other cohort involves a corporate or institutional buyer, such as a hospital or a surgery center management company.” Generally, individual doctors are interested in minority shares, which will be priced at a lower multiple, while third party entities are looking for a majority stake for which the pricing multiple is higher.

Typically, doctor-to-doctor minority interest sales are relatively straightforward. “Physicians, especially those who’ve been working in the surgery center, already have a good perspective on the variables that a third party would need to research,” Sheppard says. “They know if the center is being run efficiently, if the equipment is new or in need of replacement and what the center’s position is in the market with respect to competition and patient demographics.”

Another potential buyer may be a local hospital. “We’re seeing an uptick in physician-hospital joint ventures in surgery centers,” Sheppard says. “Although the Affordable Care Act makes it difficult for physicians to own hospitals, they’re not prohibited from owning surgery centers, and physicians and hospitals are permitted to partner in licensed ASCs.”

Blair’s firm recently assisted with the sale of a 15-year-old ophthalmic ASC to a hospital. “The founding doctor is now in his early 60s and is planning to retire in 2 years,” he says. “He brought in a new partner who’ll take over the practice but doesn’t want to own the surgery center. The older doctor sold an 80% interest in the surgery center to a local hospital, while the new partner has a 20% interest. The buyout on that ASC was seven times multiple of profits.”

Interestingly, an ASC doesn’t have to be located near a hospital to be an appealing investment to hospital administrators. “Most of the surgery centers I see entering into agreements with hospitals are off-campus,” Blair says. “Having an outpatient surgery center located away from the main campus increases the hospital’s footprint in the marketplace and creates another point of access.”

When a controlling interest is at stake in a larger surgery center, an ASC management company may be a likely buyer. “Typically, corporations buy 51% of the interest, with the doctors retaining 49%, because the stream of future cash flow depends on the surgeons’ continuing to do surgery,” states Sheppard. “The corporation has control and can influence the business direction of the center, and the doctors are still financially committed as investors in the facility, ensuring its continued success.”

Blair adds, “Corporate players typically aren’t interested in your building or in anything other than the profits you’re generating. So, if you’re making $500,000 a year and you have no debt, you could expect to see a purchase price somewhere between 6 and 7 times $500,000, or approximately $3 to $3.5 million.

“Obviously, there’s more detail than that,” Blair continues. “Any number of other factors will affect the final purchase price, but in the simplest of terms, they’re looking at profits. Other items, such as accounts receivable, become negotiating points.”

Some factors related to the value of your surgery center are difficult or impossible to change. “In a state like Michigan, where it’s difficult to obtain a certificate of need (CON), the value of a surgery center, even on a doctor-to-doctor basis, can be somewhat higher than in a state that doesn’t require a CON,” Pinto says. “Conversely, if a surgery center is located in a part of the country where it’s difficult to recruit doctors, it may have relatively discounted pricing.”

What can you do to enhance the value of your surgery center? Our experts have some recommendations.

Build Case Volume

Clearly, the more profitable your surgery center is, the more attractive it will be to potential buyers and the more you will gain from a sale. Your approach to improving profitability, increasing revenue and lowering costs, will be closely tied to your time line and your goals. Pinto offers the following scenario.

“Let’s say you’re a 50-year-old surgeon, planning to practice for another 15 years, and you want to sell 51% of your ASC to a surgery center management company. If you’re performing 50 cases per month but could increase your monthly volume to 65 cases in the next year or two, you might want to wait to sell until you’ve boosted the volume of cases. Your case volume is under your control as long as you’re running the business side of your practice well.

Sheppard agrees with this strategy. “Attracting additional cases into the facility can have a substantial and almost immediate impact on the profitability of the center and thus its valuation,” he says. Increasing your surgical volume could involve recruiting other eye surgeons to use your facility. “The marginal volume is very profitable, so multiple surgeons can benefit by working in a single facility,” Sheppard said. “In the last few years, there’s been a huge surge in retina surgery in ASCs, because the reimbursement from Medicare functionally doubled from 2008 to 2011. If there are times when your ORs are dark, and you can bring in retina surgeons, they can add to the profitability.”

Another approach would be to syndicate part of your ASC to another surgeon. “For example, if you perform 50 cases a month and another surgeon in the community is doing 25 cases a month, you might sell 25% of your ASC to that surgeon,” Pinto says. “Because many of the costs to run a surgery center are fixed, an incremental increase of 25 cases per month will have a higher profit margin. Everybody wins. The original 50-case surgeon will have a more profitable surgery center, and the new surgeon will enjoy profits from his cases that he would not otherwise enjoy. As a part owner, he would now be sharing in the profits of the center.”

Other tactics to help boost case volume could include marketing your practice more effectively and examining your case selection criteria. For example, you may be referring out cases that could be done in your own surgery center.

“In some cases, it’s a matter of building more baseline patients,” Pinto says. “In the average cataract surgeon’s practice, you’ll find one surgical case for every 25 patient visits. So, if you add an extra 25 visits in a month, you should find at least one more surgical case to perform.”

Another option would be to tilt your practice more in the direction of cataract surgery. “There are a number of practices today that 10 years ago were divided equally between cataract and refractive surgery, but with the strong decline in LASIK volume, these practices have repositioned their practices for geriatric services,” Pinto says. “By shifting their resources into that area, they’re building a larger cataract case volume.”

Check Your Costs

According to Sheppard, in a typical surgery center, two components — labor (fully burdened, i.e., wages plus benefits) and surgery supplies — comprise about 70 cents of every dollar spent. “Unless you can bring those costs down without negatively affecting the quality of the care you deliver, it’s difficult to make the center more profitable and hence increase its value,” he says. “This is a challenge, because most ASCs already utilize labor efficiently, and utilize surgery supplies that the surgeons have judged most appropriate for the way they want to practice.” These may not be the least expensive items, but surgeons don’t want to compromise outcomes to save money.

Pinto agrees that trimming costs can be difficult, but he recommends examining your staffing needs. “A typical, modest ophthalmic ASC with 50 to 100 cases every month could have a profit margin ranging from 35% to 50%,” he says. “Differences in profit margins are directly tied to how effectively each ASC deploys its staff. Some surgery centers employ a whole fleet of staff members for every case, while others are much more sparing of nursing and technical support staff. The former may be spending 25 cents of every dollar for labor, while the latter is averaging around 15 cents.”

You may want to examine your facility costs, although according to Pinto, there’s usually little you can do to reduce them. “In the most effective settings, I typically see facility costs around 4% to 6% of gross revenue,” he says. “In settings where the facility is too large for the case volume, maybe they’re still growing into it, they may be spending 10% or more.”

If you feel you’ve exhausted all avenues to improved profitability, but you’re not seeing a significant increase, you may want to consider bringing in an outside consultant to “look under the hood,” as Blair suggests. “In addition to ensuring your financial statements are in order, consultants will review your facility for efficiency and compliance to make sure it’s running on all cylinders,” he says. “Surgery centers are busy, stressful environments, and it’s easy to put off these kinds of things and justify it because patient care is more important. Certainly, patient care should be your first priority, but it’s easy to use that as an excuse to not do the other things that are necessary to keep your center running at 100%.”

As Pinto notes, “When you add up all of your costs — in almost any setting — no matter how well you’re doing, you can always do better.”

Be Ready for Opportunities

Our experts noted that myriad factors can influence the valuation of your surgery center. “We have industry parameters, but when you get down to a particular surgery center, the benchmarks merely give you guidelines, an upper and lower bound, on what you can reasonably expect the valuation to be,” Sheppard says. “But an appraiser or potential purchasers who are doing their due diligence will ask specific questions and gather information, which will enable them to assess the stability of your business going forward, and that will have an effect on the valuation. That’s why there’s a negotiation to determine a purchase price.”

Regardless of where you are in the life cycle of your ASC — whether a sale is imminent or in the future — industry experts say owners of ophthalmic ASCs are well positioned for growth.

“I’m actually quite bullish on the ASC industry,” Sheppard says. “As we see continued downward pressure on reimbursements in health care, the low-cost provider that meets quality standards is in a good position. ASCs are already the low-cost providers in the marketplace, which is why upwards of 70% of all cataract surgeries are performed in ASCs.

“Another significant factor influencing the ophthalmic segment of the healthcare industry in particular is the continued march of technology,” Sheppard continues. “As technology has improved, more types of surgery have become feasible and desirable in outpatient settings, and in ASCs in particular.”

Blair adds a final caveat for ASC owners contemplating a sale. “Given the nature of the current healthcare environment, it’s difficult today to plan 5, 10, 15 years down the road,” he says. “The smartest thing today’s surgery center owners can do is be ready to take advantage of market opportunities as they arise. To do that, your center must be running at peak efficiency all the time, every day. So that’s the goal: Always be ready.” ◊