published sources. Figure 2 (page 18)
presents revenue valuation multiples
derived from stock trades of five
publicly traded acute care hospitals.
Many incorrectly believe that a
hospital’s value can be determined by
blindly applying an average market
multiple. Without further analysis, this
simplistic approach would likely result
in a distorted estimate of value. The
publicly traded hospitals identified in
Figure 2 operate dozens to hundreds
of hospitals in different regions and
markets, can access capital markets to
fund growth, and have the economies of
scale to produce strong profit margins.
Investors are typically willing to pay
a premium for these advantages.
Figures 3 and 4 (page 18) show revenue
multiples for hospitals acquired between
2012 and 2014 segmented by size
and earnings before interest, taxes,
depreciation and amortization (EBITDA)
margin. As the figures demonstrate, all
else being equal, investors will typically
pay higher multiples for larger, well-
diversified hospitals than for smaller
community hospitals. Similarly, investors
will pay a higher revenue multiple for
hospitals with greater profit margins.
An experienced financial advisor can
analyze the risk and growth profile of a
hospital relative to market comparables
and adjust the valuation multiple that
is being applied as appropriate.
Asset Approach. For severely distressed
hospitals, the income and market
approaches can result in a valuation
below the net value of the hospital’s
tangible and working capital assets.
In these circumstances, the value of
the hospital is equal to the fair market
value of its component assets, net of
the value of its liabilities. When the
asset approach is applied, tangible asset
appraisers may be retained, as real estate
and medical equipment are typically
the hospital’s most significant assets.
One or more valuation approaches
may be applied in a hospital valuation.
When multiple methods are applied,
the financial advisor assesses the
relative strengths and weaknesses of
each approach and concludes on a
point estimate of value or a range.
A fairness opinion is an opinion that the
consideration received in a transaction
is fair, from a financial point of view.
Fairness opinions incorporate a valuation
analysis and the presentation of a range
of reasonable values, but also include
an analysis of the consideration to be
received in a particular transaction.
For a transaction to be financially fair,
the consideration need not represent
the highest or best possible price, only a
fair price that falls within the presented
range of values. Importantly, fairness
opinions do not opine on nonfinancial
benefits of proceeding with a proposed
transaction, the process leading to the
transaction, the proposed transaction
relative to any alternative transactions,
legal or regulatory considerations,
or the underlying business rationale
for the transaction, nor do they
recommend how the board should
vote on the transaction. Only the
financial aspects of a transaction are
contemplated in a fairness opinion.
A fair market value opinion can be
a critical exercise before a hospital
board initiates a sales process or
during its evaluation of offers from
potential acquirers. Because a
fairness opinion involves a review of
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