At the 19th Annual Surgery Centers Conference in Chicago on October 26, Jason Ruchaber, CFA, ASA, partner, HealthCare Appraisers, presented on the "myth of the multiple" in regard to surgery center valuation and transactions.
He began the session by explaining that providing a current average valuation multiple for ASCs is nearly impossible. “Variation multiples vary widely,” he said, adding that all ASCs do not trade within a narrow range of multiples.
Multiples vary because various factors are considered when determining a multiple. In general, a multiple is determined by considering the investment’s earnings stream, its risk and its potential for growth.
Earnings
Earnings Before Interest Taxes Depreciation and Amortization is typically used to determine earnings. The time period examined can vary but should be the period (last year, last two years, etc.) most indicative of future earnings.
Risk
Risk is the degree of uncertainty of investment return on equity. ASCs with higher risk can expect lower multiples, explained Mr. Ruchaber.
Growth
Expected growth is built into valuation models, but the multiple model is somewhat limited in that the can only account for a growth assumption of less than 5 percent per year. Therefore, multiples are really only appropriate for stable businesses. "Higher growth leads to higher multiples," he said.
Within the ASC industry, Mr. Ruchaber noted that a buyer's share of the business also impacts an investment's multiple. "There is a premium pay for controlling interest," he said.
Additionally, the investment's marketability — the ability to quickly convert property to cash at minimal cost — also impacts the value paid. Mr. Ruchaber noted that most minority investments in ASCs tend to be reasonably marketable. Local market factors, such as a pool of potential investors, competition and the degree of hospital employment also impact marketability.
He began the session by explaining that providing a current average valuation multiple for ASCs is nearly impossible. “Variation multiples vary widely,” he said, adding that all ASCs do not trade within a narrow range of multiples.
Multiples vary because various factors are considered when determining a multiple. In general, a multiple is determined by considering the investment’s earnings stream, its risk and its potential for growth.
Earnings
Earnings Before Interest Taxes Depreciation and Amortization is typically used to determine earnings. The time period examined can vary but should be the period (last year, last two years, etc.) most indicative of future earnings.
Risk
Risk is the degree of uncertainty of investment return on equity. ASCs with higher risk can expect lower multiples, explained Mr. Ruchaber.
Growth
Expected growth is built into valuation models, but the multiple model is somewhat limited in that the can only account for a growth assumption of less than 5 percent per year. Therefore, multiples are really only appropriate for stable businesses. "Higher growth leads to higher multiples," he said.
Within the ASC industry, Mr. Ruchaber noted that a buyer's share of the business also impacts an investment's multiple. "There is a premium pay for controlling interest," he said.
Additionally, the investment's marketability — the ability to quickly convert property to cash at minimal cost — also impacts the value paid. Mr. Ruchaber noted that most minority investments in ASCs tend to be reasonably marketable. Local market factors, such as a pool of potential investors, competition and the degree of hospital employment also impact marketability.
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