ASC 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:
- EBITDA of the ASC business
- Multiple of EBITDA that a buyer will pay for the business
- Rent being paid by the ASC, and
- 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 percent 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 percent 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 (CA) or 203-733-8818 (CT).
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. ASC/MOB real estate expert and broker JH Winokur, Inc. specializes in ASC and EC real estate sales and leasebacks, and ASC/MOB valuations.
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***