Journal of
Corporate
Renewal
April
2016
within two years of the filing, if the
debtor: 1) “received less than reasonably
equivalent value” in exchange for
the transfer; and 2) was insolvent
on the date of transfer or became
insolvent as a result of the transfer. 6
In distressed hospital transactions,
both the buyer and seller run the
risk of having a transaction voided
if a constructively fraudulent
transfer claim is upheld. In many
circumstances, a contemporaneously
prepared fair market value opinion
can help the parties to the transaction
demonstrate that the sales price
represented adequate consideration
at the time of the transaction, as
well as assist in demonstrating
that reasonably equivalent value
was exchanged by the parties.
Determining Value
A valuation is an independent and
unbiased opinion of an asset’s value
presented either as a point estimate
or a range. Hospital valuations
should consider the three principle
approaches to valuation: 1) the
income approach; 2) the market
approach; and 3) the asset approach.
Determining the valuation approach
or combination of approaches most
appropriate for a hospital depends on the
facts and circumstances of its situation,
but generally hinges on the facility’s
ability to generate positive future cash
flows from operations. The income
and market approaches are commonly
used to value hospitals expected to
continue as cash-flow producing
going concerns. When hospitals are
expecting to sustain losses or when the
application of the income or market
approach results in a value below the
value of a hospital’s net assets, the asset
approach may be most appropriate.
Income Approach. The income
approach is based on the financial
theory that a hospital’s value is equal
to the present value of its anticipated
future earnings. There are two common
forms of the income approach:
1) single-period capitalization; and
2) multiple-period discounting. The
discounted cash flow (DCF) method, a
multiple-period discounting model, is
commonly used in hospital valuations
because it provides the flexibility
to explicitly incorporate expected
changes in financial performance.
To perform a DCF analysis, a financial
advisor works with hospital executives
to independently develop a multiyear
cash-flow projection that reflects
changes in reimbursement, patient
volumes, and expense ratios, as well
as necessary capital investments
and changes in working capital. The
financial advisor develops a risk-adjusted rate of return to calculate
the present value of the projected
cash flows. The board should review
management’s forecast to ensure that
it reflects the best available information
at the time and that the financial
results can reasonably be attained.
A valuation based on “hockey stick”
projections is less useful as a tool to
evaluate proposed transactions.
Market Approach. The market
approach involves researching stock
sales of publicly traded hospitals
(guideline public company method)
or hospital acquisitions (merger and
acquisition method), and using this
transaction data to calculate valuation
multiples. Data on sales of shares of
publicly traded hospitals and hospital
acquisitions is available from various
continued on page 20
For more information, visit turnaround.org/events.
Golf, Education, and Networking
Hosted by TMA Detroit, Ohio, Pittsburgh, and Upstate New York Chapters
2016 TMA Great Lakes Regional Conference
May 26-27, 2016 | Painesville, Ohio | Quail Hollow Resort