By: JIM SHAUB, Partner, PHYSICIANS FINANCIAL PARTNERS
Ambulatory Surgery Centers (ASCs) offer physicians an investment opportunity to perform eligible cases in an outpatient facility as an extension of their practice. In our prior article titled, “Considerations for Buying & Financing Ownership in an ASC,” we provided a general overview of the ASC industry. Here, we will review, “What is a Fair Price for an ASC Investment.”
It is mandated under the Fraud & Abuse/Stark laws that any investment in an ASC must be purchased at “Fair Market Value.” Sounds pretty simple, but in reality, determining fair market value is often complex because of the many variables relevant to a particular ASC at any point in time. Financial performance certainly has great influence on the value, but other characteristics such as years in operation, capital expenditure needs, non-compete terms of key physicians, payer environment and contracts, case volumes, etc. all factor into valuation. The now widespread practice of third party valuations has created a more uniform process and in turn, we are seeing more consistency in prices. The general rule of thumb is that minority shares in a successful ASC are typically valued at 4 times cash flow of the ASC, less existing debt of the center. As such, less successful centers often value minority shares at a lower multiple of 2-3x.
One exception to the fair market value rule is when an existing physician owner in an ASC sells shares to a new investing physician. In this circumstance, the selling physician is not subject to the fair market value mandate, so the shares can trade at whatever the market will bear. From time to time, we see proposed physician-to-physician deals being priced at multiples of 5-6x. In these cases, a buying physician should then be aware that the rate of return on the investment over time will likely be less. Furthermore, if the physician wants to finance the investment at a higher multiple, it is important to remember that lenders tend to shy away from financing more than the fair market value and/or traditional multiples. As such, the physician may be asked to put up cash equity for the differential amount.
Another “exception” applies when a physician is considering an investment in a de novo, or start-up ASC. In these instances, the center has no track record, so the value must be derived from financial projections. The challenge here is that forecasted financial results may not turn out to be accurate, resulting in a negative or a positive variance to the original pro forma. For de novo projects, it is always smart to consult with an expert who has experience dealing with new projects. Our experience with new ASCs is that they generally take longer to ramp up and cost more than projected. While new projects often have nominal purchase prices, a physician should be aware that it may take a long time to begin earning distributions, thereby reducing the rate of return on the investment.
With more mature and successful centers, most of the cash flow is often paid out in profit distributions. Thus, at a 4x multiple, the physician would receive a $50,000 annual distribution for a $200,000 ASC investment, or an annual rate of return of 25%. Such a rate of return is outstanding when compared to most investments such as stocks, bonds, certificates of deposits, real estate, etc., which generally produce a rate of return less than 10%. Less successful and new ASCs can certainly produce returns over 10%, but it is still a good idea to consult with an independent advisor to gain a better understanding of a specific ASC investment opportunity.
ASC buy-in investments often run from $100,000 to $300,000, but it is no longer uncommon to see buy-in investments reach $500,000 to $750,000 for top-performing centers. Many physicians do not have that kind of cash readily available and it can be a bit daunting to take on a large loan. It is important for a physician to take the time to understand how the investment is valued and evaluate the likelihood for continuing success. Ask for the ASC’s 3-4 year distribution history and determine the level of consistency. A common-sense approach is to try and invest in an ASC where distributions will cover all the debt service over 5 years or less; otherwise, the physician will likely have to come out-of-pocket to service the loan. The buying physician should also consult with their tax advisor to estimate and be sure, they have adequate excess distributed cash to pay their taxes in this “new” income distribution.
Physicians always ask us two questions: “Is this investment a good deal?” and “Will you provide a loan?”
“Yes” is the answer to both questions. We have done hundreds of ASC buy-in loans and are uniquely qualified to provide feedback on fair market value for any ASC investment opportunity. We can also provide 100% financing for these investments and we do loans across the United States.