by Gabriel Andrada, MHA, CSAF, CHBC, CVA

During the last two years, the healthcare industry has faced numerous challenges including the response to COVID-19, staffing shortages, migratory patient populations, and new or changing regulatory guidelines.  While some of these challenges may be transitory, the economy continues to be subject to significant uncertainty.  For healthcare entities considering a sale, joint venture, or other business transaction, these challenges and uncertainties can make the determination of fair market value difficult. Here is a recent example of a challenge we faced when valuing a business undergoing change:

  • A surgery center had expectations of a significant increase in case volumes due to a migration of surgeons leaving a competing health system. The ASC had already begun conversations with some of these physicians indicating that some capture of these cases was likely, but specifics regarding the volume, type, and timing of any new cases was highly uncertain.

Problem:  Valuing the center as status quo could lead to an undervaluing of the center, but including these volumes requires speculative assumptions and could over value the center.

  • Uncertainty such as this needs to be taken into consideration and can be typically addressed in two ways.
    • One is to include an estimate of most likely volumes and then account for this uncertainty is through an increase in the company-specific risk component of the discount rate (using the discounted cash flow method). A potential drawback to this is the lack of a precise way to measure the appropriate level of riskiness to account for the uncertainty of additional case volumes.
    • Consideration of conducting a probability-weighted scenario analyses to derive a range of values. This involves deriving a baseline conclusion of value using the status quo, and then performing one or more analyses that assume Some level of attainment of additional volumes. These indications of value are then weighted based on the relative likelihood that each scenario may come to pass

This approach could serve as a starting point for discussions with management regarding a contemplated transaction and how to further home in on ascribing a greater degree of empiricism to capturing uncertainty in deriving the conclusion of value.

Understanding the proper way to analyze and account for atypical changes or uncertainty in an appraisal will depend on the specific set of facts and circumstances being faced by the business.  If you are contemplating a business transaction and your business is experiencing change, give us a call.  We are happy to help you understand the value implications of these changes and help you establish a fair market value.

McGuire Woods 13th Annual Healthcare Finance and Growth Conference

Eye Care Investments have been a very attractive niche for healthcare investors with more than 20 private equity placements in 2016 and 2017, and numerous other deals announced or pending during 2018. This investment activity is spurred on by very attractive fundamentals and a highly fragmented market ripe for consolidation. Paired with an ever-increasing regulatory and technological burden, many independent optometrists and ophthalmologists see strategic alignment as a means to refocus their efforts on patient care while gaining the economic benefit of a partial liquidity event.

With the heightened investment activity and media coverage of these deals, it can be difficult to distill fact from fiction. To help shed light on the economic and other variables driving eye care investments, I am very pleased to be participating on the Eye Care Investments panel at McGuire Woods 13th Annual Healthcare Finance and Growth Conference next Tuesday, September 25th. Together with my co-panelists Jose Costa, CEO of For Eyes by GrandVision, and Steven Boyd, Managing Director with Alvarez & Marsal, we will be discussing eye care investments from three distinct perspectives, including:

  • Current Transactional Trends

  • Characteristics of Attractive Investment Opportunities

  • Key Value Drivers and FMV Considerations

  • Eye Care Industry Innovation and Disruption

If you have not already registered for this excellent conference, you can do so by clicking on the following link. If you are unable to attend and would like to learn more about eye care investments, I will be posting a summary of our discussion to my blog following the conference. Hope to see you there!

The Myth of the Healthcare Multiple

BVR’s Online Symposium on Healthcare Valuation

For most, the concept of a valuation multiple is easy for market participants to understand. Unfortunately, this simplicity of concept leads to widespread misapplication of valuation multiples and often results in sellers having unreasonable expectations. In the myth of the multiple, healthcare valuation expert Jason Ruchaber, CFA, ASA, will separate fact from fiction and explore the real financial and compliance considerations that drive FMV and purchase price in healthcare transactions.

2021 BVR – Myth of the Multiple



by Jason Ruchaber, CFA, ASA

In response to the global pandemic caused by the novel coronavirus, Federal and State governments took the unprecedented action of closing large portions of the U.S. economy and issuing stay-at-home orders in an attempt to stem the spread of the disease and “flatten the curve”. These actions led to immediate and widespread economic damage, business closures and high levels of unemployment. And despite several economic stimulus packages designed to support impacted businesses and employees, the coronavirus has created a watershed moment that will fundamentally alter businesses across all industries, including healthcare.

If you or your organization was contemplating an acquisition, merger, joint venture or sale transaction prior to the COVID-19 outbreak, here are some key factors to consider:
1) History may no longer be a predictor of the future
Business values are derived from expectations regarding the future economic benefit that will be derived through ownership. These expectations are often developed as an extrapolation of historical performance, with adjustments made to reflect those changes that are reasonably known or knowable (for example the recent addition of a new payor contract or provider). In the wake of COVID-19, however, the expectation that practice patterns will return to normal once this has all passed may not be the case. With widespread unemployment, many will lose their access to health insurance and due to the loss of income may forego elective and non-emergent visits. In addition, the fear and anxiety created by the pandemic may permanently alter how patients engage with the healthcare system, with many opting to limit their exposure to physician offices and medical facilities through reduced healthcare utilization or through a transition to virtual or home-based care. As a result, pricing models developed with proformas and DCF analysis will need to be revisited and modified.
2) Pricing of risk should be carefully analyzed
In valuation, the term “risk” refers to the likelihood and magnitude that future performance will vary from expectations. Risk is priced in the form of an interest rate, or rate of return, and the corresponding value of a given set of expected cash flows is inversely related to risk (i.e., higher risk = lower value). No one could have predicted the large-scale governmental intervention to shut down the economy, and now that we have seen that this is a reality, investors must account for the possibility that future contagions may result in similar interventions. There is no model that currently prices this risk, but as institutional investors and financial markets process and analyze these new possibilities, the risk and required rates of return on equity investments will most certainly be higher.
3) Valuation Multiples
Valuation multiples observed from transactions prior to COVID-19 are no longer appropriate in the immediate post-COVID environment. Observed valuation multiples from prior transactions reflect the expectations for future financial performance and risk that existed at the time the transaction occurred. For the reasons noted above, these expectations have changed in the wake of coronavirus, and the use of these valuation multiples is no longer a reasonable basis for establishing FMV.
4) Increased debt levels
Equity value is defined as the enterprise value minus debt. In response to the business interruptions caused by the coronavirus, many organizations are funding operating losses by drawing on existing lines of credit, opening new credit facilities, and/or accepting federal stimulus dollars. This additional debt burden has a dollar for dollar reduction on the value of shareholder equity even in the absence of changes to other valuation inputs. As a result, previously valued equity transactions will need to be repriced to account for higher levels of debt.
5) Opportunities and pitfalls
Like all sudden and unforeseen events, the economic impacts of the coronavirus outbreak will create both winners and losers. Whereas reduced expectations for growth in earnings and higher risks will reduce values for many sectors of the healthcare industry, we have already seen a massive increase in investor interest for telehealth technology and platforms, and this will spawn additional opportunities in related ancillary businesses. Beyond the immediate and obvious opportunities, organizations that are able to respond and reposition themselves for the changing care environment may also benefit from these changes. These include alternative care delivery platforms such as care on demand and home-health, retail and drive-through clinics, and concierge medicine. Finally, for organizations that did not have sufficient capital or technological infrastructure prior to the outbreak, or those unable to adapt to new modalities of care, there will be a wave of business failures that will allow well managed and dynamic practices to emerge stronger and enhance their competitive position.
At Root Valuation we are committed to helping clients navigate market and regulatory uncertainties through a consultative approach to valuation services. If your organization needs help navigating a business transaction or help understanding how these changes may have impacted your organization’s value, please give us a call at 720.390.6673 or email us at