How to maximize your total ASC value
ASC physician-owners who are contemplating a sale of their ASC business often ask us “how to maximize the total value of their ASC business and their ASC/MOB real estate” when they own both and want to sell one or the other or both.
There are 4 moving parts that impact the answer to this question:
- EBITDA of the ASC business
- Multiple of EBITDA that a buyer will pay for the business
- Rent being paid by the ASC, and
- Capitalization (CAP) rate at the time of the sale of the real estate
The following examples will help physician-owners make decisions regarding how to maximize the total value of their ASC business and their ASC/MOB real estate:
Example 1: for an 8,000 sf ASC and sale of a 51% interest in the ASC business:
ASC EBITDA: $1,500,000 X multiple of 8X = ASC business value is $12 million x 51% = $6.1 million for sale of a 51% interest
Real estate (NNN) rent: $25/sf* X 8,000 sf = $200,000 per year. Value of real estate using a 6.5% CAP rate** = $3.0 million. [Note: Rent of $25/sf is significantly below fair market value of $40/sf, depending on location].
Example 2: Same scenario, but increase NNN rent to a market rate of $40/sf
Rent: $40/sf x 8,000 sf = $320,000. Value of real estate = $4.9 million
The increase in rent reduces EBITDA by $120,000. ASC business value is thus EBITDA of $1,380,000 X 8X = $11 million X 51% = $5.6 million for selling a 51% interest in the ASC business.
Net impact of raising ASC rent from $25/sf to FMV* of $40/sf:
Value of 51% of ASC business declines in value from $6.1 million to $5.6 million, a decline of $500,000. But the value of the real estate has increased from $3.0 million to $4.8 million, a gain of $1.8 million and thus a net total value gain of $1.33 million, a 15% increase in total value.
Why is this? The multiples for the sale of real estate are significantly higher than the multiples for the sale of the ASC business. For example, with a CAP rate of 6.5% the buyer is paying a 15X multiple of rent.
Example: EBITDA vs Rent (*FMV = Fair market value)
| Before raising rent to FMV* | After raising rent to FMV* | ||
| ASC | EBITDA | $1,500,000 | $1,380,000 |
| Multiple | 8X | 8X | |
| Value | $12,000,000 | $11,040,000 | |
| Sale of | 51% | $6,100,000 | $5,630,400 |
| Change | ($469,600) | ||
| Real estate | Rent | $200,000 | $320,000 |
| Multiple | 15X | 15X | |
| Value | $3,000,000 | $4,800,000 | |
| Sale of | 100% | $3,000,000 | $4,800,000 |
| Total sale | $9,100,000 | $10,430,400 | |
| Increase in value | $1,330,400: a 15% increase in value |
Suggestions for sellers of ASC real estate to maximize value:
➢ ASC owners should consider whether to increase the rent prior to selling a controlling interest in their ASC business. The owners likely will not be able to increase the rent after a sale.
➢ Rent should be market rate which is typically $35/sf to $45/sf NNN. The higher the rent, the greater the selling price of the real estate.
➢ Lease terms should be 10, 12 or 15 years plus renewal options, and be triple-net (NNN), to get the best price and most offers.
➢ Sellers should engage a broker who has national buyers competing for ASC properties and the largest buyer pool.
➢ Obtain competing purchase proposals: sellers will always get a better price and terms when multiple buyers are submitting competing bids.
➢ Consider a sale to a real estate buyer who will pay for expansions, renovations and potentially allow for minority equity participation in the real estate post sale.
➢ Sellers can take advantage of a 1031 exchange to defer taxes and provide tax-free use of the sales proceeds to reinvest in other income generating properties.
More information can be obtained from:
- Jason Winokur at [email protected]
- Jon Vick at [email protected]
- Or at: www.ascrealty.com
