Five Risk Factors Affecting Multiples in Imaging-center Acquisitions
The ongoing success of the imaging-center industry has resulted in the proliferation of operating and management companies; this, in turn, has resulted in the increased acquisition of controlling interests in the imaging centers by the operators. By gaining a controlling interest, the operating company is able to bring substantial experience and negotiating clout to the venture, typically enhancing value. The success of these partnerships, combined with this increased demand, has resulted in the willingness of these operating and management companies not only to acquire controlling interests in imaging centers, but to do so at a premium. Through our experience in the industry, we have observed that imaging-center operators typically pay a multiple of approximately four to five times a normalized level of EBITDA for a controlling interest. As would be expected, these multiples vary according to the specific facts and circumstances surrounding the transaction. The marketplace typically relies much more heavily upon EBITDA value indications (as opposed to net revenue) because a center’s EBITDA serves as a more accurate proxy for future cash flows than does revenue. There are five primary categories of risk factors that can drive the fair market value of an imaging center toward the lower or higher end of the range of acquisition multiples. They are market, operational, equipment, referring-physician, and reimbursement risk factors. Market Risk Factors There are certain market risk factors that make an imaging center more or less valuable to a willing buyer. Favorable market risk factors include the existence of a certificate of need, favorable patient demographics, and high historical population growth. Certain states require a certificate of need for the ownership and operation of diagnostic-imaging equipment; the process of obtaining one can be very time consuming, creating a barrier to entry for competitors in certain markets. Favorable patient demographics and high historical population growth tend to result in a more favorable reimbursement environment, as well as higher projections for volume growth, which (in turn) increase the value of a center. Operational Risk Factors The operational risk factors that need to be considered in the valuation of an imaging center include historical profitability, ability to sustain or grow profitability, and the center’s level of debt obligation. A center with high historical profitability has demonstrated its ability to provide high returns for its shareholders and would thus considered likely to provide similar returns for willing buyers. In addition to historical profitability, the current facts and circumstances of the center should be considered when assessing the center’s ability to sustain or grow its level of profitability. A center with a high level of debt obligation has to prioritize debt payments to its lenders over distributions to shareholders; as a result, a high level of debt obligation decreases distributable cash available for shareholders—and with it, the value of the imaging center. Equipment Risk Factors The imaging-center industry is subject to the vagaries of technological obsolescence. As a result, the value of a particular imaging center is influenced by four equipment risk factors: the age and condition of equipment, the level of technology of equipment, equipment capacity, and equipment location. A center with older or outdated equipment will require a higher level of capital expenditure in the future, decreasing its value to a potential buyer. The risks associated with equipment capacity and the location of the equipment should be considered when projecting volume growth at the imaging center. Older pieces of imaging equipment do not allow for the same level of capacity as newer equipment. In addition, the convenience of the location of the equipment can heavily influence the pattern of future referrals from physicians. Referring-physician Risk Factors Freestanding imaging centers rely on referring physicians for the bulk of their patient volume. The referring-physician risk factors that need to be considered include concentration of referral sources, ability to show growth in the number of referring physicians, practice expansion of major referral sources, and employment of referring physicians by local hospitals. Having a high concentration of referrals come from a single physician source increases the risk associated with maintaining a similar level of growth in the future. Growth in the number of referring physicians, however, demonstrates a center’s ability to diversify its referral sources and withstand any major changes in referral patterns. In addition, the expansion of major referral sources bodes well for the projected volume growth of the imaging center. If local hospitals are employing referring physicians, on the other hand, there could be an increased risk that those referring physicians will begin referring patients to their employers (hospital imaging services), rather than to the freestanding imaging center. Reimbursement Risk Factors The reimbursement environment for freestanding imaging centers can vary widely, depending on the patient population and on the strength of commercial payor contracts. The reimbursement risk factors that need to be considered include concentration of payors, reliance upon Medicare and Medicaid, and historical reimbursement growth. A high concentration of revenue from a single payor makes the imaging center highly susceptible to decreases in reimbursement (should the payor negotiate a lower rate), increasing the risk that the center would be unable to sustain its historical profitability. Conversely, centers with a low reliance on Medicare or Medicaid patients are less susceptible to changes in reimbursement by government payors and are more likely to sustain historical levels of profitability. In addition, a center’s ability to demonstrate historical growth in reimbursement decreases the risk associated with possible failure to obtain similar growth in the future. Conclusion These risk factors play pivotal roles in determining the acquisition multiple for a given freestanding imaging center. It is important to note that we have observed imaging centers with fair market value indications of less than four times EBITDA, as well more than five times EBITDA, depending on the risk factors associated with the subject center. Buyers of freestanding imaging centers should consider whether the subject center has a more or less favorable risk profile when determining whether to extend an offer that is nearer the lower or the higher end of the range. Sellers, on the other hand, should try to optimize the value of their imaging centers by mitigating the risk factors described. As merger/acquisition activity continues in outpatient imaging, those who want to buy or sell an imaging center in 2014 can apply an understanding of these risk factors to assess the intrinsic fair market value of the subject center appropriately. Eric Heath is a senior analyst with VMG Health, a national health-care transaction advisory and valuation company.