HealthCare Appraisers Share Valuation Tips and Trends
Considering acquiring an ambulatory surgery center this year? You're in good company, according to the 2013 ASC Valuation Survey (pdf) conducted by Delray, Fla.-based HealthCare Appraisers, which showed 53 percent of survey respondents planned to buy between one and five ASCs during 2013.
Of the 17 survey respondents representing more than 500 ASCs, 56 percent acquired between one and five ASCs last year, and 36 percent performed due diligence on 11 or more ASCs.
Partners at HealthCare Appraisers' Denver office Todd Mello, ASA, AVA, MBA, and Jason Ruchaber, CFA, ASA, shared highlights of the survey's findings during a March 7 webinar hosted by Becker's ASC Review, including what investors look for in potential acquisitions.
How EBITDA multiples are calculated. Mr. Ruchaber says in order to understand the multiples in the survey, one should understand the basic math behind a multiple. In a simplistic example, a multiple can be a formula 1/(k-g), where "k" is the organization's expected rate of return or risk and "g" is the expected growth rate of its earnings stream. For example, if an ASC has a 15 percent rate of return and a 5 percent earnings growth rate, then 1/(.15-.05) = 10.0, meaning the organization would have a 10 times multiplier on its earnings, in this example, cash flow. A more complicated formula is required to for pre-tax earnings, such as EBITDA, which the ASC survey respondents generally use to determine share price for investors.
Mr. Ruchaber notes that only organizations that have shown stable trends in EBITDA performance should be valued using a multiple, saying multiples should not be applied to entities demonstrating significant volatility in earnings.
How investors use the multiples. According to the survey, 60 percent of investors expect annual earnings growth rates between 3.1 and 6.0 percent for the first few years after a transaction, and the other 40 percent expect greater than 9 percent growth. Valuation data as set forth in the survey helps investors develop a reasonable expectation as to the value of shares, Mr. Ruchaber says, but also highlights the key distinctions between controlling and minority interest valuations, as well as the limitations behind valuation multiples.
Controlling interests — generally representing more than 50 percent of ownership — trade at higher multiples than minority interests due to their ability to influence governance and decision-making. Mr. Mello says the number of controlling-interest acquisitions is increasing, with hospitals stepping to the plate more frequently for such transactions.
Last year, 71 percent of controlling-interest purchases for single-specialty ASCs had multiples of 5.0 to 6.9 times EBITDA, and 79 percent of such purchases for multispecialty centers were valuated at 6.0 to 7.9 times EBITDA. Multispecialty centers tend to be valued higher, he said, mostly because their diversified specialties help to spread risk and position them well for new payment models under health reform.
In valuing minority-interest transactions, appraisers and buyers need to consider discounts for lack of control and lack of marketability the presenters say, because these transactions are priced at less than a "prorata" share of the overall ASC's value due to lack of control rights and oftentimes, some illiquidity in selling the interest. Still, minority shareholders in ASCs are "generally not passive investors," Mr. Ruchaber says. "When you have shareholders that are integral to the success of the business, we find the governing documents are generally very friendly to minority shareholders."
Other trends. Responses from the survey show 53 percent of investors would shy away from a deal if more than 20 percent of an ASC's revenue came from out-of-network sources, viewing that makeup as beyond their risk threshold. That becomes tricky for centers that rely on the non-discounted out-of-network payments as a key component to their financial performance, Mr. Mello says. He cautions, however, that "not all out-of-network centers are created equally," as some are less susceptible to revenue renegotiation or reduction than others.
Other factors should be considered when pricing ownership units, Mr. Mello says. About 56 percent of survey respondents said they would pay a premium of 0.26 to 0.75 added to the multiple for an ASC that has a certificate of need, for example.
Nearly all specialties remain desirable for investors, the presenters say, though plastic (i.e., cosmetic) surgery is an exception, and podiatry and gynecology are among the least desirable. Orthopedics and spine specialties continue to top the list of desirable specialties.
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