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Questions to ask re: ASC valuation

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  • Questions to ask re: ASC valuation

    I am a surgical subspecialist and a partner and I are looking into buying into a local ASC that opened about a year ago. We asked them to get a formal valuation and this has now been done. The CPA who did the valuation has made himself available to us to ask questions about how he came up with the share valuation etc. I'm wondering if the price that is assessed for each share can be "negotiated". I.e., if it's set at some multiple of EBIDTA, can you ask them to set a certain percentage of discount on the share price? I say this because my partner and I would be bringing in two higher paying subspecialty type cases and it will require quite a bit of leg work for us to get the center up to date with doing those types of cases

  • #2
    You can try to negotiate anything. But they also can’t necessarily grant you a discount on your promise to bring more cases, as that would violate or at least be at risk of violating anti-kickback issues. You still have to buy-in at a fair valuation. What that number is might be negotiable, or might not be; between 2-5x EBIDTA is typically fair. Below that might be suspect, above that and they’re hoping you’re a sucker.

    EBIDTA in this situation is usually referred to as an “adjusted EBIDTA,” which is essentially the current annual distribution, so make sure you know what exactly the EBIDTA they’re quoting you is. If they aren’t distributing anything yet then I can’t help you, talk to another accountant.

    Buying in at a year might be great; if they aren’t super successful yet and you can help make them more profitable, you might buy in now at 2x the annual distribution but in 3 years you could be receiving 5x your buy-in. You may also lose all your money.

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    • #3
      Great, that's really helpful thanks. I am definitely treating this as a higher risk/reward investment, but I like the concept of having ownership and buy-in. I will discuss the adjusted EBIDTA with the guy who did the valuation and take it from there.

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      • #4
        it should be well defined how this center determines its value and how it determines shares price. You would want the buy in for your shares to be the same as the next guy that buys in or sells.

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        • #5
          Sometimes there can be a range of valuations often dependent on the multiple of EBITDA. See the details of the valuation calculation and see if it's based on earnings, assets, debt, etc. Certainly look at the financials to see what has been returned. Sounds like a good opportunity if it's run well and you have good billing.

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          • #6
            Has anybody seen ASCs valued by discounted cash flow and what kind of metrics to go by?

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            • #7
              Did the owners of the ASC hire the CPA to perform the valuation? Or did you hire your own CPA who represents you to perform the valuation? It would be worthwhile to get your own, independent professional to give an opinion before you pull the trigger.

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              • #8
                The owners of the ASC hired a CPA to do an independent valuation after we asked them to. From what I've read in books, this is fairly standard to have a valuation done before issuing share prices so as to stay within the legal framework (stark etc)? Am I mistaken that this is the norm? Sounds like it was quite an expensive thing to do. The CPA firms I spoke to gave me rough quotes of $15k or so to do a valuation so that's a no go for me personally

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                • #9
                  Discounted cash flow is quite typical for medical practice valuations (haven't seen it for ASC since that's not my field). Getting a third party valuation is safe practice and protects both parties involved. Not always necessary but probably best for a start up with a lot fewer years' worth of financials to go by.

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                  • #10
                    Originally posted by jhwkr542 View Post
                    Discounted cash flow is quite typical for medical practice valuations (haven't seen it for ASC since that's not my field). Getting a third party valuation is safe practice and protects both parties involved. Not always necessary but probably best for a start up with a lot fewer years' worth of financials to go by.
                    How do the 3rd party valuations determine value? I have actually only seen practices valued as a combination of hard assets, good will, and accounts receivable. More recently, multiple of ebitda with PE on the scene. The good will is of course the most contentious part of negotiations. Is the discounted cash flow what is used to determine good will? Likewise, I've only ever seen ascs valued on multiple of ebitda but I'm not sure how to take into account the value of the equipment and contracts.

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                    • #11
                      Originally posted by wcinewbie View Post

                      How do the 3rd party valuations determine value? I have actually only seen practices valued as a combination of hard assets, good will, and accounts receivable. More recently, multiple of ebitda with PE on the scene. The good will is of course the most contentious part of negotiations. Is the discounted cash flow what is used to determine good will? Likewise, I've only ever seen ascs valued on multiple of ebitda but I'm not sure how to take into account the value of the equipment and contracts.
                      It depends on the type of purchase as to how the valuation will work. You can buy the assets, in which you'll value the assets (equipment, AR, goodwill), or you can buy the equity, where you'll value it based on future earnings potential. This latter variation is where you'll get into the different methods of discounted cash flow vs multiples of EBITDA. The DCF is generally forward looking, and multiples of EBITDA looks backwards. Depending on circumstances, one method may be preferred over the other. In startups, using EBITDA would undervalue the earnings potential. In more established practices, the two methods should be similar if EBITDA has been fairly constant. It's the multiple and discounted rate that would be points of negotiation.

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                      • #12
                        What are normal ranges for discounted rates for an ASC?

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                        • #13
                          That I do not know. I'm sure it would depend on the location and how risky the business is. Put another way, this is basically what you hope the annual return to be. Risky investments should have higher returns and higher discounted rates (and lower valuation). More established practices with solid financials will yield the opposite.

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