Many owners of ambulatory surgical centers make a mistakewhen selling their ASC. They don't know how to maximize the multiplier basis,which is the metric buyer uses to multiply the final price and determine themarket. They oftenbelieve multiples of past earnings are a primary method for valuing theirbusiness. Investors only care about pastperformance as an indicator for future earnings. Future profits are not what buyers buy, but future profits.
Physician-owners tend to think of revenue as minimizingtaxable income. Investors, however, focus on revenue in terms maximizingprofits. Althoughminimizing taxes can be a good strategy during tax time, it doesn't accurately reflectyour ASC’s financial performance. When youare preparing to sell, your goal is to optimize earnings by adjusting the ASC'soperations.
If you do it after the fact you will adjust for anyone-time expenses or other unnecessary expenditures. This is known as"recasting" earnings or normalizing earnings. These adjustments enable buyers to see the true value andprofitability of the center.
These are five examples of common items that could beresold.
1. Owners and employees receive compensation. The physician-owner's total compensation may not bereassessed. However, the amount of salary and bonus that he or she pays toothers is mostly discretionary. It can, however, be adjusted. You can add compensation above and beyond the market valueto your earnings before taxes.
2. Owner "perks" and fringe benefits. Many ASC owners get many "perks" and benefits thatare not necessary for the day-to-day operation of their surgery center. A vehicle is sometimes necessary, but a more luxuriousautomobile or SUV is not usually required. The physician-owner may be reimbursed for discretionaryexpenses that may not apply to a new owner. These expenses do not affect theASC's profit performance. Examplesinclude:
Personal travel and entertainment expenses
Unearned family compensation includes wages, vehiclesand trips.
- A large life insurance contract, or pension plan
- Personal use assets such as a condo or plane
- expenses paid by another company owned andcontrolled by the same seller
3. Employee-related items. Some employee-related items can be modified after the sale,and they can be added to pre-tax earnings.
4. One-time items. One-time,extraordinary or non-operating income and expenses are added back to thefinancial statements to eliminate items that are not likely to be repeated orunrelated to ASC's operations. This ensures they will not be incurred by a newowners. Common examples include:
Donations
- bad debt expenses
Uninsured Losses
Marketing and trial ads
5. Business practices that are discretionary. Other business expenses that won't be incurred by the newowner in the future and may be recasted include:
Business insurance beyond what is necessary
Rent excess
Overpaid expenses to reduce taxes
Employees receive lump sum bonuses
