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What is a Surgery Center Worth?
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
Presented By
Todd J. Mello, ASA, AVA, MBA, Founding Partner
Jason Ruchaber, CFA, ASA, Partner
Webinar Outline
Multiples and Other Findings from HAI’s 2013 ASC Valuation Survey
• History, Purpose and Limitations of the Survey
• What are Valuation Multiples? The Meaning Behind the Numbers
• How Minority vs. Majority Control Interests Impact a Valuation
• Average Multiples for Minority Interests – Single-specialty vs.
Multispecialty Centers
• Average Multiples for Controlling Interests – Single-specialty vs.
Multispecialty Centers
• Recent Results Compared to Historical Results
• Out-of-Network Center Valuations - How Do Buyers Really Value
OON Centers?
• What's the Going Rate for ASC Management Fees?
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
2
History, Purpose & Limitations
of the Survey
• Since 2003, HAI has published nine annual surveys
reporting valuation multiples and related topics on the
ASC industry
• Why? To provide a centralized source of market
intelligence on valuation trends within the ASC industry.
• Disclaimer: Survey should not be used in lieu of a formal
valuation.
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
3
What are Valuation Multiples?
The Meaning Behind the Numbers
The Finance Definition (a.k.a. Appraiser speak)
“A mathematical expression of risk and growth, which when applied to a
perpetually recurring earnings stream results in an indication of value”
A multiple is mathematically expressed as follows:
1
(K  g )
• Where, (K) represents the rate of return (risk), and
• (G) represents the growth rate of the earnings stream
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
4
What are Valuation Multiples?
The Meaning Behind the Numbers – An Example
• The risk of the investment warrants a 15% rate of return
• The growth of earnings is expected to be 5% per year
• Formula:
1
(K  g )
=
1
.15  .05
= 10.0x multiple
1) How are risk and growth determined?
2) 10.0x What?
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
5
What are Valuation Multiples?
• Before we can truly understand valuation multiples, and apply
them to a particular ASC, we need to understand three key
components:
1. Definition of the Earnings Stream
2. Estimation of Risk (K) measured as a rate of return
3. Estimation of the rate of earnings Growth (g)
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
6
Three ASC’s with $2.0M EBITDA
$2,500,000
Valuation Date
$2,000,000
$1,500,000
ASC 1
ASC 2
$1,000,000
ASC 3
$500,000
$0
2009
2010
2011
2012 (P)
2013 (P)
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
7
How Minority vs. Majority Control
Interests Impact a Valuation
• Simply stated: As we will see in some upcoming slides, interests
providing absolute control (e.g., greater than a 50% interest whereby
key aspects of control are not diminished by governing documents or
otherwise) are worth more than interests which do not have the same
control rights.
• Control granted by the governing documents. Examples include:
• Capital calls and distributions
• Admission of new investors
• Borrowings greater than a certain amount
• Entering into material contracts
• Selling, merging, or liquidating the company
• Concept of “effective” control – physicians control with their feet
typical ASC ownership agreements are very friendly to the minority
shareholder
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
8
Average Multiples for
Minority Interests
Single-Specialty Centers
Multi-Specialty Centers
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
9
Average Multiples for
Controlling Interests
Single-Specialty Centers
Multi-Specialty Centers
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
10
Recent Results Compared to
Historical Results
• Single-Specialty
• Minority – 66% 3-4X
• Control – 71% 5-7X
• Multi-Specialty
• Minority – 50% 3.5- 4.9X (increase)
• Control - 79% 6-7.9X (increase)
• Acquisition activity for controlling interests is increasing;
hospitals have stepped up efforts
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
11
Out-of-Network Center
Valuations
How do buyers really value OON centers?
• Recent survey results indicate 66% of respondents
would shy away from centers where OON revenue
constitutes 40% or less of total revenue.
• 69% “convert” OON revenue streams to in-network for
valuation purposes.
• 36% decrease valuation multiples by > 2.0X
(significant increase over prior survey)
• Bottom line – fact and circumstance specific
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
12
What's the Going Rate for ASC
Management Fees?
• 70% charge between 5 and 6% of net revenue.
• 38% have minimum management fees ranging
between $100 and $200K.
• 59% have sliding scale management fees whereby fees
decline after a predetermined revenue threshold
(i.e., generally when annual management fees
approach $500,000 to $750,000).
• Full-time dedicated center administrators are not
included in these fees.
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
13
QUESTIONS?
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
14
What is a Surgery Center Worth?
Multiples & Other Findings From
HealthCare Appraisers’ 2013 ASC Valuation Survey
Todd J. Mello• tmello@hcfmv.com
Jason Ruchaber • jruchaber@hcfmv.com
HealthCare Appraisers, Inc. – Denver Office
(303) 688-0700