Here are the three most commonly applied approaches for valuation of ASCs, according to the Astor Group's "Investment in the Healthcare Industry" white paper. For a copy of the full report, click here.
1. Comparable transactions. This method employs the use of valuation multiples derived from transactions involving similar ASCs. The comparable transaction multiples are then adjusted based on the strengths and weaknesses of the ASC relative to selected comparable centers. Value is determined by multiply the trailing-twelve month cash flow or EBITDA by the valuation multiple, subtracting long-term debt and adding cash and cash equivalents.
EBITDA multiples are highly dependent on current economic conditions and recent transactions, but typically increase when a majority interest is sold. Numerous factors impact the multiple including: growth potential of a company and how much capital expenditures will be required to support growth, quality of existing systems and management, local competition and whether the physicians will continue on with the ASC after a transaction. Other factors can include the sources and sustainability of revenue, the payor mix, out-of-network revenue and current capacity.
2. Income approach. The income approach attempts to project future cash flows and then adjust these values to the present using a discount factor (discounted cash flow analysis). This is not as common for ASCs as it is in other industries as it is very difficult to estimate future ASC revenue and therefore not deemed reliable by most acquirers. Typically, not-for-profit hospitals use this method to purchase physician-owned centers.
3. Cost approach. Also known as the adjusted net assets methods, this approach is built upon the premise that the ASC is worth the cost to build and/or replace the existing center, adjusted for depreciated cost of the improvements. Additionally, an ASC's fixed, financial and other assets are netted against all existing and potential liabilities in determining a final value. The cost approach is most commonly used for valuing centers that are break-even or not profitable.
Learn more about Astor Group. Astor Group is a global M&A and strategic advisory firm that partners with clients to raise capital, expand into new markets, buy and sell businesses and solve financial and strategic challenges.
Read more about ASC valuation issues:
- 4 Operating Agreement Risk Factors That Impact an ASC's Value
- Are ASCs Values Going Up or Down?
- 4 Financial Risk Factors That Can Impact an ASC's Value
1. Comparable transactions. This method employs the use of valuation multiples derived from transactions involving similar ASCs. The comparable transaction multiples are then adjusted based on the strengths and weaknesses of the ASC relative to selected comparable centers. Value is determined by multiply the trailing-twelve month cash flow or EBITDA by the valuation multiple, subtracting long-term debt and adding cash and cash equivalents.
EBITDA multiples are highly dependent on current economic conditions and recent transactions, but typically increase when a majority interest is sold. Numerous factors impact the multiple including: growth potential of a company and how much capital expenditures will be required to support growth, quality of existing systems and management, local competition and whether the physicians will continue on with the ASC after a transaction. Other factors can include the sources and sustainability of revenue, the payor mix, out-of-network revenue and current capacity.
2. Income approach. The income approach attempts to project future cash flows and then adjust these values to the present using a discount factor (discounted cash flow analysis). This is not as common for ASCs as it is in other industries as it is very difficult to estimate future ASC revenue and therefore not deemed reliable by most acquirers. Typically, not-for-profit hospitals use this method to purchase physician-owned centers.
3. Cost approach. Also known as the adjusted net assets methods, this approach is built upon the premise that the ASC is worth the cost to build and/or replace the existing center, adjusted for depreciated cost of the improvements. Additionally, an ASC's fixed, financial and other assets are netted against all existing and potential liabilities in determining a final value. The cost approach is most commonly used for valuing centers that are break-even or not profitable.
Learn more about Astor Group. Astor Group is a global M&A and strategic advisory firm that partners with clients to raise capital, expand into new markets, buy and sell businesses and solve financial and strategic challenges.
Read more about ASC valuation issues:
- 4 Operating Agreement Risk Factors That Impact an ASC's Value
- Are ASCs Values Going Up or Down?
- 4 Financial Risk Factors That Can Impact an ASC's Value