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Medical practice valuation appraisal


Published on Medical practice valuation information and advice by a certified and licensed medical practice valuation professional. … Medical practice valuation information and advice by a certified and licensed medical practice valuation professional.

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  • 1. Medical Practice Valuationby Keith Borglum
  • 2. Why Value a Practice ?
    Associate buy-in
    Marital Divorce
    Owner Exit/Breakup
    Litigation, non-compete, economic damages
  • 3. 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
  • 4. 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 aboveor below the appraised value
    A practice can have value withouta sales price, as in a divorce
  • 5. 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”
  • 6. Premises of Value
    Going Concern - ability to generate income despite aninterruption in ownership
    Liquidation - income is interrupted,can be “forced” or “orderly”
  • 7. Components of Value
    Tangible - furniture, instruments, supplies, accounts receivable, withholds & bonuses, cash, postage, pre-payments
    Intangible - cash flow, goodwill, location, reputation
    Liabilities - loans, debts
  • 8. 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
  • 9. The Asset Approach
    Rarely used in small to medium sized medical practices, unless low income
    Rarely used for<50% ownership
    Rarely used in limited-asset businesses
    Sometimes used to value young ortroubled businesses
  • 10. 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 (the individual’s profit above labor) is commonly used
  • 11. 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
  • 12. How to Value Goodwill
    Total value minus tangible assetsor
    By reportor
    By calculation
  • 13. 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
  • 14. 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
  • 15. Market Value Summary
    Must adjust subject value toparticulars of the historicvalue of sold practices.
  • 16. 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
  • 17. 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
  • 18. The Income Approach - Risk
    Small 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)
  • 19. Income Approach Summary(simplified)
    Normalized Income
    - Market Rate Compensation
    x Growth Rate
    / Cap rate
    = Fair Market Value
  • 20. 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
  • 21. 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.
  • 22. Reconciling Value - Example
  • 23. Common Appraisal Errors
    Failure to normalize income properly
    Incorrect market compensation, failure to considerfull-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
  • 24. 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
  • 25. 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.
  • 26. Summary: What is a Practice Worth?It all depends on the facts!
  • 27. Keith Borglum CHBCCertified Healthcare Business ConsultantLicensed Practice Broker & AppraiserFaculty or Consultant for many Medical Associationsmore info and CV atMedical Practice
    You wouldn’t refer to an “unlicensed doctor”.
    So don’t use an unlicensed, uncertified “consultant”!