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