Medical practice valuation appraisal

MedicalPracticeAppraisal.com

Medical Practice Valuationby Keith Borglum CHBC


http://www.medicalpracticeappraisal.com/medicalpracticevaluation/


Why Value a Practice ?

Purchase/SaleAssociate buy-inMarital DivorceOwner Exit/Breakup InsuranceLitigation, non-compete,

economic damages


Financial v. Emotional Value People feel “pride of ownership”

in their businesses and see “value” in the effort made to start and grow it

The market place primarily determines what financial value is represented in the business


Value v. Price Value is an opinion, not a fact Price is negotiated between two individuals

each with a unique interest Many practices sell for a price above

or below the appraised value A practice can have value without

a sales price, as in a divorce


Standards of Value

Fair Market Value - to a hypothetical buyer Investment Value - to a particular buyer Fair Value - no buyer involved Liquidation Value - at “auction”


Premises of Value

Going Concern - ability to generate income despite aninterruption in ownership

Liquidation - income is interrupted,can be “forced” or “orderly”


Components of Value

Tangible - furniture, instruments, supplies, accounts receivable, withholds & bonuses, cash, postage, pre-payments

Intangible - cash flow, goodwill, location, reputation

Liabilities - loans, debts


Approaches to Value

Asset - the value of the assembled components, aka adjusted book value, net asset value, accumulation value

Income - the value of the benefit stream to the owner

Market Comparison - what similar practices sold for


The Asset Approach

Rarely used in small to medium sized medical practices, unless low income

Rarely used for<50% ownershipRarely used in limited-asset businessesSometimes used to value young or

troubled businesses


The Income Approach The favored approach by the IRS in

Revenue Ruling 59-60

Usually favored for operating practices

Dividend-paying capacity via net cash flow (the individual’s profit above labor) is commonly used


The Market Approach

Compares the subject to prior similar sales

The subject’s value must be adjusted to the comparable sales for time, place, facts

Typically excludes liabilities, AR and cash


How to Value Goodwill

Total value minus tangible assetsor

By reportor

By calculation


Market Comparison

Similar Purpose - sale, buy-in, or divorce Size of practice by collections/group size Method of valuation used in prior transaction Overhead and profitability Year & Place of transaction

– Some studies include pre-2004 Medicare cuts– Some states had short term inflated values

resulting in federal litigation


Valuing Tangible Assets Fair Market Value under a Premise of Going

Concern considers the used valueassembled in place.

NOT liquidated auction value NOT depreciated tax value USUALLY excludes accounts receivable, cash

and cash equivalents, and assumes liabilities will be paid-off


Market Value Summary

Must adjust subject value toparticulars of the historicvalue of sold practices.


The Income Approach - Issues

Best values the income stream above themarket-compensation of owner (ie “dividends”)

Does not differentiate between tangible assetsand goodwill

Requires an opinion of specialty future growth rate, not historic practice growth rate

Requires an opinion of market-rate risk and return


The Income Approach - Normalizing

Owner’s income must first be “normalized” to include benefits like:– Auto & Entertainment– Health, life, and disability insurances– Exotic-locale Continuing Education– Owner’s salary plus profits– Pension and profit-sharing contributions– Usually uses pre-tax rather than after-tax earnings


The Income Approach - RiskSmall medical practice is high risk and

requires high returns on investment– Start with 20 year treasury bonds– Add risk for S&P 500– Add risk for small size– Add industry and specialty risk– Add specific practice risk

= Practice Risk ROI needed (“cap” rate)


Income Approach Summary(simplified)

Normalized Income

- Market Rate Compensation

x Growth Rate

/ Cap rate

= Fair Market Value


Asset Value If Income or Market Approaches indicate a value

of less than the value of the assets, then use Asset Value as “highest and best”.– If it is a going concern, use fair market value

of the tangible assetswithout a cost of liquidation


Reconciling Value

The values found by different Approaches usually differ from each other.

You must apply logic, reason, and experience to then find a single value, or range of values.


Reconciling Value - Example

Method Value Weight Weighted

Market $350,885 40% $140,354

Income $364,466 60% $218,679

Weighted 100% $359,033

Rounded Value

100% $360,000


Common Appraisal Errors Failure to normalize income properly Incorrect market compensation, failure to consider

full-time-equivalence schedule Failure to consider medical issues like Medicare planned

payment reductions or capitation impacts Using after-tax instead of pre-tax income Unsupported cap rate/ risk too low Using divorce comps for sales transactions, or

unadjusted Goodwill Registry medians


Critical Valuation Error

Not applying a discount for a minority interest in many (not all) cases– Full value requires “control”– Lack of control creates a discount disproportionate to

the reduced interest 49% of a $1,000,000 corporation may have a value near zero The 51% owner can do anything they please with the

company and assets


Choosing an Appraiser Should be member of a legitimate

appraisal association like IBA or ASA, and follow industry standards for reports, like USPAP

Should specialize in healthcare –most appraisers either do mostly/only healthcare, or none at all

There are levels of appraisal- choose the right level for your purpose

If you need a practice broker, use a licensed broker, even just for advice.


Summary: What is a Practice Worth?

It all depends on the facts!


Keith Borglum CHBC

Certified Healthcare Business ConsultantLicensed Practice Broker & Appraiser

Faculty or Consultant for many Medical Associationsmore info and CV at

Medical Practice Appraisal.com

You wouldn’t refer to an “unlicensed doctor”. So don’t use an unlicensed, uncertified “consultant”!

http://www.medicalpracticeappraisal.com/medicalpracticevaluation/

Date post:	17-Jan-2015
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