How do you put a price tag on a surgery center? Two words: future earnings.

"The value of any business is not based on historical earnings but rather future earnings," says Elliott Jeter, CFA, CPA, a principal at Value Management Group, a healthcare valuation and transaction advisory firm. "Historical earnings are only relevant to the extent they help predict future earnings. Just like publicly traded stocks, the value of privately held ASC partnership shares can change depending on changes in the facts and circumstances that affect future cash flow."

Whether you're looking to sell part or all of your surgical center to a corporate, hospital or physician partner, here's a look at some of the variables that go into setting a fair price.

Math and market forces
NovaMed last month acquired an ownership interest in its 32nd surgery center when it paid $9.15 million in cash for a 61 percent interest in the Clearview Surgical Institute. The 2-year-old multi-specialty ASC in Laredo, Texas, does more than 3,000 cases per year. The individual physician-partners of Clearview collectively retained a 39 percent limited partnership interest in the entity.

How was the $9.15 million figure arrived at? A little addition and multiplication (see "Using

EBITDA to Determine Your Center's Value"), a little give and take, says Scott Macomber, executive vice president and CFO of NovaMed.

On the one hand, you're bound by the tenets of paying fair market value. "We go right to the center's income statement," says Mr. Macomber. "How many cases do you do per year? What are your annual revenues? What are your operating expenses? What's your profit?" But, on the other hand, as with most products, price is determined by what others in the market are willing to pay. For example, larger multispecialty centers in good markets with good growth potential command the highest multiples, says Mr. Macomber. "The multiple range has been in the five to eight times EBITDA area," he says. "It moves a bit with competition as well as how desirable each ASC is."

One of the best ways to increase the value of your center is to project a future of growth, says Jon Vick, president of ASCs, Inc., in Valley Center, Calif., which helps surgery center owners obtain premium valuations and purchase proposals from surgery center management companies and hospitals. Do this by identifying new docs that you could recruit into your facility, then generating a pro forma that shows the financial impact of doing so, he says. "Show the company the future. The company will buy what it can see."

Mr. Vick offers these other strategies to increase the value of your center.

• Recruit cases that can be done quickly (ophthalmology, pain and GI, for example) and eliminate unprofitable, long cases (such as plastics).
• Recruit commercial and private-pay cases and those that generate high facility fees (such as bariatric and spine surgery).

The good news for today's physician-owners is that it's a seller's market. Oftentimes brokers will approach you and ask you if you're interested in selling an interest in your surgery center. They'll offer to help expedite the process by putting you in touch with a prospective buyer.

"If they're willing to hear what someone's willing to pay, doctors really don't have to put a price on their centers themselves," says Mr. Macomber.

Future earnings in a surgery center partnership can be very volatile, says Mr. Jeter. Factors affecting the risk of future cash flow include

• Cash flow projection factors. Case volume, mix and reimbursement; growth in volume and reimbursement; opportunities for expansion (rooms, surgeons) and stability of operating expenses.
• Risk assessment factors. Diversification (number of surgeons, number and type of specialties and payors) size and demographics of physician ownership, appropriate non-competes and ability to attract new investors; nature of payor contracts (substantial portion of out of network?) quality and age of facility and equipment; competent management; and barriers to entry (CON).

ASC values are based on profitability, so anything you can do to increase profits will increase value, says Mr. Vick. In addition to increasing revenue by increasing volume and selecting cases that pay high facility fees, Mr. Vick says you can increase profitability by increasing efficiency, shortening turnover, case costing to make sure cases are profitable (if not eliminate them or do them out of network), reducing staffing costs, collecting receivables in 35 days or less, reducing supply costs and benchmarking. According to the VMG ASC database, the average center performs around 17.4 cases per day at around $973 each. About one-fourth of those are Medicare cases.

Another point to keep in mind: ASCs have relatively short life cycles, says Mr. Jeter. They mature in years five through 12. After that, profits generally decline faster than revenues.

Getting a better price
When LifePoint Hospitals in Brentwood, Tenn., last month acquired Havasu Surgery Center in Lake Havasu City, Ariz., for an undisclosed price, the surgery center had a good bit of leverage in the negotiations to form a joint venture. Consider this:

• Since opening in 2001, the 18,000-square-foot surgery center, which has annual revenue of about $5.5 million, had cut into the business of neighboring 138-bed Havasu Regional Medical Center, one of 53 hospitals in 20 states that LifePoint owns. The ASC has four ORs (three in use), two GI suites, three pain management suites and a minor procedure room.
• The 5-year-old surgery center, which had acquired three acres of surrounding land and was doing 8,000 procedures a year, made no secret of its plans to expand into a full general acute care hospital. Brent Cherne, CPA, the surgery center's CEO, says physicians had raised about $3 million of the $7 million that would have been needed to expand the facility. "Obviously they didn't want another hospital to be in town," says Mr. Cherne. "While we were working on the capital raise, [LifePoint] approached us. Everyone likes options, but we didn't pursue a deal with them very strongly at first because we wanted to see where our own [expansion] project was going to go."
• The ASC had its doctors sign five-year non-compete agreements, twice as long as typical non-competes. This assured the hospital group that the docs wouldn't start a competing ASC. "That has a value," says Mr. Cherne.
• Before it agreed to joint venture with the hospital, the ASC invested $1.8 million into developing preliminary plans for the new hospital's zoning, architecture and design - "intellectual property," says Mr. Cherne.
• The ASC had 17 physician-owners, not long ago re-syndicating shares to five surgeons who had been using the facility. "It's important to have many physicians be an integral part of ASC," says Mr. Cherne, "even if they're small owners percentage-wise. We let physicians buy in for as little as $5,000 and as high as $100,000. It's better to say, 'We have 17 physician-owners' rather than 10 or five."

Mr. Cherne wouldn't disclose the sales price, but admitted his docs didn't get as much as they'd wanted in the stock-and-cash deal. "Price was an important part but it wasn't the only part," he says. "Price by itself wasn't going to get the deal done. Docs wanted a say in how they'd practice medicine. Plus, you don't have a lot of leeway when you structure these deals, because you can't pay more than fair market value. You can negotiate on price, but not a whole lot."

An independent appraiser set the value of the ASC's real estate holdings and a valuation expert set the price on the operations side based primarily on historical volumes, revenues and expenses. "In our case, the value of the operations is worth more," says Mr. Cherne.

All surgeons who perform cases there will be invited to buy a share of the hospital-surgery center venture, says Mr. Cherne. Original owners can take some cash off of the table so long as they maintain $250,000 in stock in the joint venture.

Add younger physicians
Recruiting young physicians is key to increasing your facility's value. "If you don't periodically bring in new physicians, you wind up losing out in the long run," says Scott Becker, JD, CPA, a partner at McGuire Woods in Chicago. "Every year, you look for the opportunity to add a couple of new physicians and you sell them a share at fair market value." When you sell shares to younger physicians, their cases can become incrementally profitable since fixed costs are covered by the existing partners' cases, says Mr. Jeter.

When Dave Abraham, MD, a spinal orthopedic surgeon, and eight other surgeons opened the Reading (Pa.) Surgery Center in 2002, a single share cost $42,000. Today, it's $140,000. A corporate partner owned 30 percent of the center. Two years later, with the center valued at $24 million, the physician-owners cashed out 50 percent of their interests and sold 65 percent of the ASC to a new corporate partner.

"It's a little bit circular in the sense that physicians looking to sell need to get their facilities in shape and then add more partners," says Robert Cimasi, MHA, ASA, the president of Health Capital Consultants in St. Louis. "You're always looking to add breadth and depth to your ownership to keep it profitable."

When deciding on a price tag for your ASC's partnership shares, you must take into account the earnings of the surgery center, the investors in the center, competing surgical facilities, whether the surgery center is in-network or out-of-network, and how many competing hospitals and surgery centers offer the same procedures you do.

More than 50 ASC companies are interested in investing in ASCs, but each one is looking for something different and places a higher value on ASCs that have what they are looking for. Some companies are looking for high cash flow, others for de novos or turnaround situations. Some look for majority interest, others for minority. Some look for specific specialties, most don't want plastic cases. Some want to build up profitability and then resell, others are long-term partners. Some are well capitalized, some have no capital.

"Selling an ASC is a strategic decision," says Mr. Vick. "The sellers must know their own goals and must also know the goals of the potential buyers, and must pick the right buyers to sell to.'Sellers will receive higher offers from ASC companies that are looking for what the sellers have to sell."