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Healthcare Acquisition

To improve patient access to care in its geographic region, a large not-for-profit-health system was expanding through M&A activity. American Appraisal was engaged to perform a straightforward valuation for financial and regulatory reporting purposes . . . until things became a little more complicated.

 

A large not-for-profit health system was expanding through M&A activity, and had engaged American Appraisal to provide valuations for financial reporting and regulatory compliance purposes. One of its target properties, another not-for-profit health system, involved a large assemblage of assets, including:

  • An acute-care hospital with 300+ beds
  • Clinic facilities used by more than 60 specialty and subspecialty physicians
  • Medical equipment, furniture and fixtures, and underlying and excess land associated with the properties
  • Certificate of Need and Medicare/Medicaid license
  • Certain equity investments

In addition, the asset purchase agreement allowed the target health system foundation to remain independent, retaining most of its investment funds. American Appraisal’s healthcare industry experience left us well positioned to handle all aspects of this valuation, from the tangible assets to the equity investments.

Financial reporting standards require the fair value of an enterprise’s underlying assets to reflect a market participant’s view of the enterprise’s economic value. Thus, financial performance expectations were a key component of our fair value analysis.  We valued the target health system as an operating business enterprise, allocated the values of its many underlying assets within that framework, and presented the client with our preliminary conclusions of value.

Upon reviewing our preliminary conclusions, our client recognized a potential issue with its tax-exempt bond covenants. Bond covenants often include financial metrics that are dependent of asset values . . . and the target system’s reduced financial performance expectations had resulted in lower-than-expected fair values for the acquired assets.

We worked with our client and the target system to re-evaluate financial performance expectations and refine our preliminary conclusions.  Early recognition of this bond financing issue allowed the parties to negotiate covenants with their lenders and restructure the transaction to satisfy the lenders’ requirements. 

American Appraisal will continue to assist our client subsequent to the transaction’s closing, with the performance of a complete inspection and listing of the personal property and a reconciliation of the physical inventory of assets to the accounting ledger for the facilities.

Read more about American Appraisal’s healthcare-related valuation services

 

 

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