Surgical Hospital Business Valuation
Surgical hospitals are unique businesses. Surgical hospitals are not ambulatory surgery centers, nor are they general acute care hospitals. Ideally, surgical hospital business valuations should only rely upon market data from other directly comparable surgical hospitals.
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Surgical Hospital Business Valuation - Doctor Deals Podcast #26
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Surgical hospital business valuations, like all business valuations, rely on market data. Valuators use market data to normalize financial ratios, debt-to-equity capitalization ratios, expenses, and elements of reimbursement.
- Working capital ratios: Days of cash on hand, days of sales (DSO) in accounts receivable, accounts payable, accrued expenses, etc.
- Debt-to-equity capitalization ratios: The normalized weighted mix of the cost of capital for debt and equity.
- Financial ratios: Vertical income statement expense ratios as a percentage of revenue AND balance sheet account ratios as a percentage of total assets.
Normalized Working Capital Ratios
For example, all business valuations involve adjustments for a normalized level of working capital. Those working capital normalizing adjustments require directly comparable benchmark data for days of cash-on-hand, days in accounts receivable, accounts payable, accrued expenses, and other short-term working capital accounts. Surgical hospitals definitely do not want to set normalized days of cash-on-hand or accounts receivable based on ratios for general acute care hospitals. General acute care hospitals may hold 180 days of cash on hand or carry several months of accounts receivable.
Normalized Debt-to-Equity Capitalization Ratios
One of the most impactful ratios affecting business valuations is the debt-to-equity capitalization ratio. Business valuators can significantly alter surgical hospital business valuations with a normalized debt-to-equity ratio. Even if your surgical hospital does not carry any debt, a valuator may still apply a normalized debt-to-equity ratio for your business based upon debt-to-equity ratios for comparable businesses. In business valuations, the cost of debt is generally always less than the cost of investment equity.
For example, equity investors in your business may require an annual rate of return between 20% and 30% on their investment, while a lender with a first lien may be satisfied with an 8% interest rate. Given this large difference in the cost of capital between debt and equity, the normalized debt-to-equity ratio that your valuator applies will likely impact your surgical hospital business valuation by millions of dollars. In the scenarios below, the debt-to-equity ratio can mean the difference between a 5 times earnings multiple and a 10 times earnings multiple.
- 100% equity and 0% debt: 25% required rate of return on equity becomes the discount rate for the valuation. Approx. 5x multiple (1/(.25-.05 growth rate))
- 60% equity and 40% debt: (25% required rate of return X 60%) + (8% interest X 40%) = 18.2% discount rate. Approx. 7.5x multiple (1/(.182-.05 growth rate))
- 40% equity and 60% debt: (25% required rate of return X 40%) + (8% interest X 60%) = 14.8% discount rate. Approx. 10x multiple (1/(.148-.05 growth rate))
We Have the Data!
Health-Contract.com maintains a longitudinal database of financial and benchmarking ratios for hundreds of U.S. surgical hospitals. We track debt levels, working capital ratios, growth rates, and expense and reimbursement benchmarks for all surgical hospitals in the U.S.
Example Data: Surgical & Physician-Owned Hospitals
Sample of basic financial data for 120 surgical & physician-owned hospitals
Beyond financial ratios, most business appraisers are spreadsheet monkeys who have no first hand knowledge of how surgical hospitals are staffed, managed, or reimbursed.
Do you want a business appraiser who developed and managed surgical facilities for years? You’d be hard-pressed to find another appraiser who has spent as much time in periop as me.
I’m Nick Newsad from Health-Contract.com. Contact me directly for surgical hospital business valuation services and data.
