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How COVID-19 blew up standard approaches to valuations — 3 takeaways

There are several ways healthcare assets can be assessed for mergers and acquisitions, and for other situations and events where a valuation is needed.

Assessing the value of these assets using fair market value (“FMV”) versus other valuation methodologies is of upmost importance. COVID-19 tested FMV and other valuation frameworks because of the extraordinary business circumstances in healthcare seen through 2020. As a standard of value FMV proved to be highly adaptable. 

During Becker's ASC Review's 27th Annual Meeting-The Business & Operations of ASCs, in a virtual session sponsored by VMG Health, Colin Park, director at VMG Health, and Steven Palmer, vice president of development at United Surgical Partners International, discussed how the pandemic has altered the valuation and transaction landscape. 

Three takeaways:

  1. FMV stood up where other valuation frameworks didn't adequately measure COVID-19's impact. FMV provides an objective, independent valuation opinion. It's the preferred approach from a compliance perspective and is often used for specific business events, such as physician buy-in or buy-out, expansions, acquisitions and sales. Other frameworks — such as book value, standard market multiple and an operating agreement formula — simply did not adequately capture the effect of COVID-19 on healthcare businesses.

  2. Even the FMV approach needed tweaking. In developing a valuation opinion, FMV observes three approaches to value - the cost approach, income approach andr a market approach. COVID-19 affected all three of these approaches. For example, the cost approach looks at tangible assets plus identifiable intangibles: working capital, real estate, debt and intangibles like certificate of need and legal titles. It provides a "floor" value for a property.

    COVID-19 had short- and long-term effects on this approach. Cash balances, in many cases, were drained. But new capital flowed in through paycheck protection program loans and grants. At the same time, many health systems and ASCs shifted to a practice of keeping more cash and inventory on hand. The income approach observes the projected earning capacity of a business and the risk of achieving these earnings. COVID-19 shut down elective procedures and quickly impacted current operations. By utilizing an income approach, a valuation can normalize for events, such as COVID-19, when building out the future earnings of  business.

  3. Real-life scenarios during the pandemic showcased what needed to be adjusted and what didn't. "As we've looked the past 18 months, I think every valuation we've looked at has had some COVID adjustment," Mr. Palmer said. "We actually changed our model, so that we could clearly factor in the COVID impact into these valuations."

    Mr. Park agreed. "Our valuations in May of last year look different than they did in May of this year." It was hard to project what might happen in May 2020 amid surges of COVID-19, so valuations naturally added in depressed performance. As the recovery began, it became clear those performance dips had by and large recovered. 

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