Five Risk Factors Affecting Multiples in Imaging-center Acquisitions

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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