medical practice valuation appraisal pdf

8/9/2019 Medical Practice Valuation Appraisal PDF

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Medical Practice Valuationby Keith Borglum CHBCMedicalPracticeAppraisal.com

MedicalPracticeAppraisal.comMedicalPracticeAppraisal.com


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Why Value a Practice ?

Purchase/Sale

Associate buy-in

Marital Divorce


Insurance

Litigation, non-compete,economic damages


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Financial v. Emotional Value

People feel pride of ownershipin their businessesand see value in theeffort made to start and grow it


The market place primarilydetermines what financial value

is represented in the business


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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


pract ce can ave va ue w t outa sales price, as in a divorce


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Standards of Value

Fair Market Value - to a hypothetical buyer

Investment Value - to a particular buyer

Fair Value - no buyer involved-



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Premises of Value

Going Concern - ability to generateincome despite aninterruption in ownership

-


,can be forced or orderly


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Components of Value

Tangible - furniture,instruments, supplies,accounts receivable,

withholds & bonuses, cash,-


,

Intangible - cash flow,goodwill, location, reputation

Liabilities - loans, debts


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Approaches to Value

Asset - the value of the assembledcomponents, 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


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The Asset Approach

Rarely used in small to medium sizedmedical practices, unless low income

Rarely used for


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The Income Approach

The favored approach by the IRS inRevenue Ruling 59-60

Usually favored for operating practices

Dividend-paying capacity via net cash flow


is commonly used


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The Market Approach

Compares the subject to prior similar sales

The subjects value must be adjusted to thecomparable sales for time, place, facts


yp ca y exc u es a t es, an cas


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How to Value Goodwill

Total value minus tangible assetsor

By reportor


By calculation


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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


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Valuing Tangible Assets

Fair Market Value under a Premise of GoingConcern considers the used valueassembled in place.

NOT liquidated auction value


eprec a e ax va ue

USUALLY excludes accounts receivable, cashand cash equivalents, and assumes liabilities

will be paid-off


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Market Value Summary

Must adjust subject value toparticulars of the historic

value of sold practices.



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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 historicpractice growth rate

Requires an opinion of market-rate risk and return


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The Income Approach - Normalizing

Owners income must first be normalized to includebenefits like:

Auto & Entertainment

Health, life, and disability insurances

Exotic-locale Continuing Education


Owners salary plus profits

Pension and profit-sharing contributions

Usually uses pre-tax rather than after-tax earnings


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The Income Approach - Risk

Small medical practice is high risk andrequires 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)


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Income Approach Summary

(simplified)Normalized Income

- Market Rate Compensation

x Growth Rate


/ Cap rate

= Fair Market Value


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Reconciling Value

The values found bydifferent Approachesusually differ from eachother.


You must apply logic,reason, and experienceto then find a single

value, or range of values.


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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


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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 plannedpayment reductions or capitation impacts

Using after-tax instead of pre-tax income


nsuppor e cap ra e r s oo ow

Using divorce comps for sales transactions, orunadjusted Goodwill Registry medians


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Critical Valuation Error

Not applying a discountfor a minority interest inmany (not all) cases

Full value requires control


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


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Choosing an Appraiser

Should be member of a legitimateappraisal association like IBA or ASA, andfollow industry standards for reports, likeUSPAP

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


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

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


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Summary:

What is a Practice Worth?It all depends on the facts!



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medical practice valuation appraisal pdf

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