Carnahan Group Special Topics Review: Market Multiples in Hospital Transactions

December 2021


Carnahan Group employees are accredited by the National Association of Certified Valuators and Analysts (“NACVA”) and, as a result, they abide by the standards and definitions set forth by NACVA. The principles-based Standards have been developed to provide guidance to NACVA members and other valuation professionals performing valuation services. The use of professional judgment is an essential component of estimating value.


Three traditional approaches can be used to value an interest in a closely held entity: Market Multiples in Hospital Transactions

Income Approach

• The application of the income approach establishes value by methods that capitalize future anticipated benefits, such as cash flow, by a discount or capitalization rate that reflects market rate of return expectations or conditions, as well as the risk of the relative investment.

Cost Approach

• The cost approach considers the cost to reproduce or replace the property valued. From this amount, an allowance is deducted for any depreciation or obsolescence present, whether arising from physical, functional, or economic causes. As applied to the valuation of furniture, fixtures, and equipment, the cost approach considers an estimate for the costs involved in developing a similar organization and securing similar business relationships. The cost approach results in an equity value.

Market Approach

• The Market Approach analyses market transactions involving interests in similar companies to gauge the value of the subject firm. The pricing multiples derived from these market transactions are applied to the subject company’s metrics to derive its relative value.

This briefing focuses on the Market Approach and the use of Market Multiples in Hospital transactions. Since the Market Approach is dependent upon comparable transactions, the predictive value derived is only as useful as the underlying data. Therefore, good data is a fundamental prerequisite to correctly apply the Market Approach to solve for value.

There are two methods of valuation that are considered in the use of the Market Approach:

1. Guideline Public Company Method

This method evaluates the prices paid for publicly-traded company equities as the basis to determine the value of the subject company. The principle behind the Guideline Public Company Method is that the day-to-day sales price of an individual share of stock is reflective of the market value of the entire company’s equity. This method relies on the assumption that the selection of public companies similar to the subject company should produce meaningful equity multiples for the valuation of privately held companies.

2. Merger and Acquisition Method

The merger and acquisition (transaction) method estimates the value of a subject company by examining similar transactions and determining multiples that can be applied to the subject company. The theory behind this approach is that companies with similar operating and financial characteristics should be priced similarly.

Once appropriate guideline transactions are identified, their “value measures” are compiled and examined to determine how they may apply to the subject company. These “value measures” are usually a multiple computed by dividing the price of the guideline company’s stock as of the valuation date by some relevant economic variable such as revenues; EBITDA; or earnings after tax. Several challenges are encountered when attempting to identify guideline transactions to compare to the subject company, including the following:

Identifying other healthcare companies that focus on providing the same services as those of the subject company.

Identifying similar guideline transactions of a comparable size. A company’s size may give it a competitive advantage (or conversely, limit its ability to compete) in several key areas, such as its access to the capital markets, its ability to create economies of scale and purchasing power, and its diversification in geographic markets and in its product line offerings.

Market Multiple is defined as the market value of a company’s stock or invested capital divided by a company economic measure (such as Revenue, Income, Cash Flow) or other company measure (such as number of physicians, operating rooms, licensed beds, etc.)

How We Can Help

Carnahan Group utilizes nationally recognized transactional databases such as DealStats, Bizcomps, and Pitchbook to gather market multiples. Additionally, Carnahan Group reviews compiled survey data from, including but not limited to, Form 990s, SEC Filings, and Press Releases.

Carnahan Group is a national health care consulting firm specializing in strategic, business, and compensation valuation services. Carnahan Group has vast experience in hospital and private practice transactions. Kay Ferrell was a founder of IASIS Healthcare Corp., the seventh-largest hospital management company with revenues of $865 million yearly. Kay also served as Director of Physician Development and Acquisitions for HCA Healthcare Corp., where she developed, analyzed, and/or valued over 600 physician practice acquisitions, joint ventures, and syndications with transaction values up to $400 million.

Carnahan Group also performs Community Health Needs Assessments (“CHNAs”), Physician Workforce Analyses and Planning along with strategic advisory services. Carnahan Group’s clients encompass large integrated and academic health systems, physician practices, and various ambulatory care providers, rural hospitals as well as pharmaceutical and device companies.

Please contact Carnahan Group for additional information or a focused analysis on market multiples.

Prepared by Adrian Machin and Kay Ferrell

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Disclosure: Our business is not a law firm and is not acting as your attorney or providing you with legal advice, legal representation, or advocacy of any kind.