2018 market update: Strong market for outpatient facility acquisitions tempered by focus on narrowing definition of quality of earnings

Written by Matthew Searles, Partner at Merritt Healthcare, for Becker’s ASC Review

While the acquisition market for outpatient businesses, such as ASCs and surgical hospitals, remains strong, buyers are laser focused on quality of earnings which limits opportunities for some facilities to realize higher valuations.

Facilities will find a competitive market if they meet certain quality of earnings criteria such as a diversified, in network revenue stream; support from sustainable practices with succession plans in place; and reasonable access to growth opportunities. It is possible to gain a strong valuation without one or more of these characteristics if the facility represents strategic value to a particular buyer, but overall we see buyers taking a more conservative approach.

As has been the trend in recent years rising costs, modest reimbursement increases and the near elimination of the out-of-network model have led to an environment that requires sustainable, high volume and strong management to drive success. As a result, consolidation has increased as scale is now a pre-requisite for success. Smaller facilities can be attractive to buyers but, but as noted they need to represent some strategic value or an opportunity for consolidation into a larger center.