If you're interested in buying or selling an ASC, or even if you just work for one, there may come a time when you want to know what the business is worth. This may be necessary for obtaining financing, increasing the facility's value for the future, completing a succession plan, bringing in a management partner, selling the entire facility, or simply satisfying your curiosity. Regardless of the reason, many factors affect the value of an ASC. Earnings are critical, but growth potential, assets, location, and reputation can also influence the worth of an ASC. Here is a rundown of the issues you need to consider when valuing one.

Earnings
Earnings are the most important contributor to a facility's value. The healthier the financial results, the higher the value. When a center is profitable and generates over $500,000 annually, valuation experts typically rely on an "income approach" to determine the market value of an ASC. The income approach projects historical financial performance into the future. This model balances earnings against expenses, taxes, depreciation, amortization, inflation, and reinvestments for future growth (see spreadsheet).

Many valuation experts will also evaluate the results of the income approach in light of the facility's replacement costs (that is, what it would cost to replace the facility), the market value of other ASCs, and situational factors and adjust the facility's value if needed. After all these calculations, says Jon Vick, President of Valley Center, California-based ASCs Inc., the fair market value of an ASC will typically range from three to six times the projected earnings before interest, depreciation, taxes, and amortization (EBIDTA) depending on the number of specialties. "For single-specialty centers, the multiple is typically three to four times EBIDTA," says Mr. Vick. "For multispecialty centers, the multiple typically ranges from four to six times EBIDTA."

Growth potential
The second most important contributor to an ASC's value is its potential for growth. Multispecialty centers bring in higher EBIDTA multiples for this very reason. To get a handle on an ASC's growth potential, valuation experts recommend asking the following questions:

• Is the facility dominated by a single surgeon? When an ASC is dominated by a single surgeon, the potential for growth is severely limited, agree experts. "If a single physician does 50 percent or more of the surgery at a center and is nearing retirement, what will happen when the surgeon does retire? In all likelihood, the center will not do so well," notes Luke Lambert, Chief Financial Officer with Ambulatory Surgery Centers of America in Norwell, Mass.
• Can the facility recruit new surgeons? Even if facility managers and owners want to recruit new surgeons, there may be factors beyond their control that will limit their ability to do so. According to Mr. Lambert, neutrality is key to successful physician recruitment. "For example, if an ASC is owned by one ophthalmic practice and is part of, or adjacent to, the practice, everyone in the community may see the ASC as the ?eye practice's surgery center'," he explains. "Surgeons don't want to tell their patients to go to the competitor's surgery center." If this is the case, potential to increase profits is limited and may even decline over time with inflation and falling reimbursements.
• Does a certificate of need (CON) limit the facility's expandability? Another factor that can limit growth is a CON. According to Elizabeth Hand, President of Franklin, Tennessee-based Floreat, single-specialty ASCs can have serious CON restrictions that make expansion into other specialties nearly impossible in many states. "Some CONs are restricted to single practices, not just single specialties," she says. Mr. Lambert also recalls one center that, although it presented itself as a multispecialty ASC, had a CON that did not permit administration of general anesthesia. "This would prevent the facility from growing into a true multispecialty center," he says.
• Is the ASC physically maxed-out? Any physical restrictions that limit the ability to increase volume can cap profit potential. A four-OR ASC that can be converted into a surgical hospital, for example, would be more valuable than a four-OR ASC with the same earnings that cannot be converted, offers Mr. Vick. Other structural issues can also hinder expansion into new specialties. "You cannot realistically do ophthalmology or GI in a facility with too few pre- and postop bays," explains Mr. Lambert. "The ophthalmologist or GI specialist will not tolerate waiting around for the next case while patients recover." Indeed, one endoscopist needs to work in two suites, as volume is the profit driver given the relatively low reimbursement and expensive sterilization equipment that characterizes this specialty, agrees Brett Hickman, Managing Partner with V4 Consulting, Indianapolis, Ind.
• Can the ASC realistically attract profitable new specialties? Experts place a high value on facilities that offer orthopedic services, as one procedure can typically bring in a facility fee worth thousands. However, it may not be realistic for a center to attract a specialty like orthopedics, because it can throw off the entire schedule. "Orthopedic surgeons are inherently inefficient when mixed into a multispecialty facility because their procedures can run long," says Mr. Hickman, noting that the facility must be set up specifically to deal with such situations.

Assets, Location, Reputation
When a facility's earnings and growth potential are not ideal, assets, location, and reputation take on increased importance in the value of the ASC.

• Assets. For centers generating less than $500,000 in annual profits, valuation experts will typically determine the facility's value based on replacement costs. "If for whatever reason we like a particular market-say a local physician group wants to start up a center or buy into a surgery center-we will consider offering an unprofitable center the replacement value for its assets," explains Mr. Lambert. According to Mr. Lambert, there can be some benefit to an existing license and accreditation, since the new partners can start operating right away. "We never buy assets just because they're cheap," he notes. "What matters is the profits that can be generated from those assets in the future."
• Location. As mentioned earlier, a location apart from the associated medical practice can help foster a perception of neutrality to the community and other physician groups. Of course, it also helps to be serving a market with favorable demographics.
• Reputation. An ASC's reputation can take on great significance or it may not matter at all, depending on the circumstances. For example, a patient death can be devastating, while competitive rancor is meaningless. "We are not concerned about negative reputations that grow out of professional jealousy or resentment," says Mr. Lambert. "Physicians who own their own surgery centers tend to be strong competitors and, as a result, make a few enemies in their communities." According to Mr. Vick, however, there is some value to a medical staff that has an overall solid reputation in the community because this makes it easier to attract new partners and cases.

Increase Value
The best way to improve the value of an ASC is to increase earnings. Apparently, many ASCs have tremendous opportunities to do so. "Many centers run like country clubs," says Mr. Vick. "They are often 50 percent utilized and making $1 million a year with no incentive to bring in other surgeons." According to Paul Davis, Managing Principal, ASC Operations, with the Ambulatory Surgery Group of Johnson and Johnson Health Care Systems Inc., perhaps the two best ways to increase earnings is to bring in new surgeons/specialties and improve payor penetration.

• New surgeons/specialties. "If an ASC can double its case volume, it can more than double profits because there are significant fixed costs," explains Mr. Lambert. "This is the best shot at improving the value of the center." A big winner right now is pain management, notes Mr. Hickman, since Medicare reinstated the facility fee for these procedures. Of course, the inverse is also true: If a facility has surgeons who routinely lose money on cases, advises Mr. Lambert, they need to be encouraged to improve their efficiency.
• Improve payor penetration. Experts say this is not as difficult as it may seem, but it does require ASCs to take a leadership role in the payor-provider relationship. "ASCs need to understand and apply their leverage over hospitals when it comes to payors," says Mr. Vick. "They offer significant cost savings." According to Mr. Hickman, 75 percent of the battle for ASCs is getting organized and knowing where they stand; the rest is negotiating with payors. Many ASCs, he says, don't even know the state of their contracts because reimbursement was so strong for so long, and this lack of knowledge means there is money left on the table. "The payor contracts are typically four to five years old, don't have a fee schedule attached, and in most cases are not even signed," he says. Mr. Hickman advises getting all fee schedules from all payors and, if possible, loading them into a practice management system. He also recommends focusing on payment terms and time limits. For example, some payors will not reimburse if an ASC files 30 or more days after a procedure. "This is not reasonable when the ASC is awaiting pathology reports, the transcriptionist is on pregnancy leave, or any other situation arises that delays filing," says Mr. Hickman. "Build in more flexibility."

Clearly, another good way to increase earnings is to decrease expenses. According to an Ambulatory Surgery Management Society Survey, ASC expenses in 1999 gobbled up 68.4 percent of net revenue-with medical and surgical supplies comprising 19.7 percent, salaries and benefits comprising 22.7 percent, and all other expenses comprising 26 percent of net revenue. "Typically, expenses range between 65 and 80 percent of net revenue depending on how well the ASC is run and the specialty mix," explains David Pflueger, MBA, President of Pluris Healthcare Services in Golden, Co. To minimize expenses, experts advise that ASCs get involved with a good group purchasing organization (GPO). According to Mr. Hickman, GPOs no longer do business only with large providers. "Although discounts won't be as deep for smaller facilities," he says, "they want their business now." To find a good GPO, Mr. Hickman advises that ASCs find out which organization the local hospital uses, use the internet to shop for GPOs that cater to a specialty or specialty mix, and allow potential GPOs to evaluate their needs. "GPOs are highly qualified to evaluate a case mix and comment on whether they can help," he says.

The Value is in the People
Nearly all of the factors that influence an ASC's value point to one common denominator: People. "The core value of any surgery center is not in the hard assets. It's in the physician group," stresses Mr. Lambert. He says many real estate developers are losing money on ASC investments because fixed costs are too high and they can't get enough cases to cover them-much less turn a profit.

Mr. Hickman says his firm walks away from many opportunities because the investments will not create value for the community. Indeed, recommends Mr. Davis, even if ASCs do not want to venture into a formal partnership, if they view all relationships as partnerships, they will build a valuable enterprise that profits everyone. "Good relationships are less formal than true partnerships, but they build cooperation, not competition," he says.