Maximizing ASC value: EBITDA & ASC rent

The case for increasing ASC rent to maximize total ASC value

ASC 1

ASC 2ASC physician-owners often ask us “how to maximize the total value of their ASC business and their ASC/MOB real estate when they own both and want to sell”.

There are 4 moving parts that impact the answer to this question:

1. EBITDA of the ASC business
2. Multiple of EBITDA that a buyer will pay for the business
3. Rent being paid by the ASC, and
4. Capitalization (CAP) rate at the time of the sale of the real estate

The following examples will help physician-owners make decisions regarding how to maximize the total value of their ASC business and ASC/MOB real estate:

Example 1: for a 7,000 sf ASC and sale of a 51% interest in the ASC business:

NNN Rent: $30/sf* X 7,000 sf = $210,000 per year. Value of real estate using a 7% CAP rate** = $3 million

ASC EBITDA: $1,000,000 X multiple of 8*** = ASC business value is $8 million x 51% = $4.1 million for sale of a 51% interest

Example 2: Same scenario but increase NNN rent to $40/sf

Rent: $40/sf x 7,000 sf = $280,000. Value of real estate = $4 million

The increase in rent reduces EBITDA by $70,000. ASC business value is thus EBITDA of $930,000 X 8 = $7.44 million X 51% = $3.8 million for a 51% interest in the ASC business.

Net impact of raising ASC rent from $30/sf to $40/sf:

Value of 51% of ASC business declines in value from $4.1 million to $3.8 million, a decline of $300,000. But the value of the real estate has increased from $3 million to $4 million, thus a net total value gain of $700,000.

Why is this? The multiples for the sale of real estate are significantly higher than the multiples for the sale of the ASC business. For example, with a CAP rate of 7% the buyer is paying a 14X multiple.

Suggestions for sellers of ASC real estate to maximize value:

➢ ASC owners should increase the rent prior to selling a controlling interest in their ASC business. Otherwise they may not be able to increase the rent during or after a sale.

➢ Rent should be market rate which is $30/sf to $40/sf NNN. The higher the rent, the greater the selling price.

➢ Leases should be 10 to 15 years plus renewal options, and be triple-net (NNN), to get the best price and most offers.

➢ Sales should be made when there are multiple buyers seeking to buy ASC/MOB real estate, which is currently the case

➢ Sellers should engage a broker who has ready buyers for your property.

➢ Obtain competing purchase proposals: sellers will always get a better price and terms when multiple buyers are submitting competing bids.

➢ Sellers should take advantage of a 1031 exchange to defer taxes and provide tax-free use of the sales proceeds to reinvest in one or more income generating properties.

ASC Physician-owners can obtain fair market value rents, current cap rates, and valuations for their ASC business and real estate by contacting ASCs Inc. at 760-751-0250.

Since 1998 ASCs Inc., has advised ASC physician-owners on development, merger, and strategic acquisition transactions for over 250 physician-owned ASCs, endoscopy centers (ECs) and surgical hospitals. JH Winokur, Inc. has extensive experience in ASC and EC sales, real estate sales and leasebacks, and ASC/MOB valuations. They can be reached at 760-751-0250 or jonvick@ascs-inc.com. More information can be obtained at: www.ascs-inc.com

Footnotes:
*Fair market value for ASC NNN rent averages $30 to $40 per sf, depending on location **CAP rates vary between 5% and 8% depending on location and terms of the lease ***Current multiples of EBITDA for controlling interests are 7X to 9X EBITDA, with an average of 8***

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