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Skoda Minotti Medical Practice Valuation Presentation
 

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Providing you with the information you need to know about valuations for medical practices.

Providing you with the information you need to know about valuations for medical practices.

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Skoda Minotti Medical Practice Valuation Presentation Presentation Transcript

  • 1. Medical Practice Valuation James P. Sacher, CPA October 10, 2012
  • 2. STANDARD OF VALUE• What is the Standard of Value? – Professional standards – Stark Law
  • 3. FAIR MARKET VALUE“the price at which property would changehands between a willing buyer and a willingseller, when the former is not under anycompulsion to buy, the latter is not underany compulsion to sell, and both partieshave reasonable knowledge of the relevantfacts” [Rev. Rul. 59-60, 1959-1 CB 237]
  • 4. REGULATORY ISSUES• Regulatory Issues – Stark Law – Anti-Kickback statues – Tax laws
  • 5. REGULATORY ISSUES• Regulatory Issues – Stark Law • Financial relationship • With an entity • Designated health services – Anti-Kickback statues – Tax laws
  • 6. REGULATORY ISSUES• Regulatory Issues – Stark Law – Anti-Kickback statues • Knowingly and willfully • Intent to induce referral • Solicited, offered or paid remuneration – Tax laws
  • 7. REGULATORY ISSUES• Regulatory Issues – Stark Law – Anti-Kickback statues – Tax laws • Private Inurement – individual can‟t receive organization‟s funds except at FMV • Private Benefit • Excess Benefit
  • 8. REGULATORY ISSUES• Regulatory Issues – Stark Law – Anti-Kickback statues – Tax laws • Private Inurement • Private Benefit – tax exempt organized to serve the public interest not private; no bright line test • Excess Benefit
  • 9. REGULATORY ISSUES• Regulatory Issues – Stark Law – Anti-Kickback statues – Tax laws • Private Inurement • Private Benefit • Excess Benefit – transaction priced at higher than market value with a disqualified person
  • 10. STARK LAW DEFINITION“the value in arms-length transactions, consistent with the generalmarket value. „General market value‟ means the price that an assetwould bring as the result of bona fide bargaining between well-informedbuyers and sellers who are not otherwise in a position to generatebusiness for the other party, or the compensation that would be includedin a service agreement as the result of bona fide bargaining betweenwell-informed parties to the agreement who are not otherwise in aposition to generate business for the other party, on the date ofacquisition of the asset or at the time of the service agreement. Usually,the fair market price is the price at which bona fide sales have beenconsummated for assets of like type, quality, and quantity in a particularmarket at the time of acquisition, or the compensation that has beenincluded in bona fide service agreements with comparable terms at thetime of the agreement, where the price or compensation has not beendetermined in any manner that takes into account the volume or value ofanticipated or actual referrals.” [42 C.F.R. 411.351]
  • 11. STARK LAW DEFINITION“the value in arms-length transactions, consistent with the generalmarket value. „General market value‟ means the price that an assetwould bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position togenerate business for the other party, or the compensation thatwould be included in a service agreement as the result of bona fidebargaining between well-informed parties to the agreement who are nototherwise in a position to generate business for the other party, on thedate of acquisition of the asset or at the time of the service agreement.Usually, the fair market price is the price at which bona fide sales havebeen consummated for assets of like type, quality, and quantity in aparticular market at the time of acquisition, or the compensation that hasbeen included in bona fide service agreements with comparable termsat the time of the agreement, where the price or compensation has notbeen determined in any manner that takes into account the volume orvalue of anticipated or actual referrals.” [42 C.F.R. 411.351]
  • 12. STARK LAW DEFINITION“the value in arms-length transactions, consistent with the generalmarket value. „General market value‟ means the price that an assetwould bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position togenerate business for the other party, or the compensation thatwould be included in a service agreement as the result of bona fidebargaining between well-informed parties to the agreement who are nototherwise in a position to generate business for the other party, on thedate of acquisition of the asset or at the time of the service agreement.Usually, the fair market price is the price at which bona fide sales havebeen consummated for assets of like type, quality, and quantity in aparticular market at the time of acquisition, or the compensation that hasbeen included in bona fide service agreements with comparable termsat the time of the agreement, where the price or compensation hasnot been determined in any manner that takes into account thevolume or value of anticipated or actual referrals.” [42 C.F.R. 411.351]
  • 13. APPROACHES• Approaches to Valuation – Asset based or cost approach – Market approach – Income approach
  • 14. ASSET OR COST• A standard balance sheet approach• Convert historical balance sheet into economic balance sheet• Value both tangible and intangible assets• Quantify liabilities• Could be very time consuming
  • 15. MARKET APPROACH• Comparables – Identification comparable transactions
  • 16. MARKET APPROACH• Comparables – Guideline companies – P/E ratio – MVIC to sales – MVIC to EBIT – MVIC to EBITDA
  • 17. MARKET APPROACH• Comparables – But what is comparable?
  • 18. MARKET APPROACH• Comparables – But what is comparable? – Caracci, et al. v. Comm., 98 AFTR 2d2006- 5264 (456 f.3D 444) Key questions raised: • What is required for market comparability • What is reasonable knowledge of relevant facts • What should be valued, assets or market value of invested capital
  • 19. CAUTIONS• Cautions – Level of payment for service varies radically from state to state and even market to market – Urban markets are dominated by a few health insurers who hold significant influence over the fees paid to providers – Very few insurers have national market coverage and those that do have significant market share in only a few states – Payor mix is critical – Inconsistent with Stark regs. – Requires in-depth analysis of revenues and future prospects – Reality check
  • 20. INCOME APPROACH• Values the expected cash flows in the future discounted by an appropriate cost of capital rate – Expected cash flow – Risk of cash flow
  • 21. INCOME APPROACHExpected cash flowEBIT x (1- tax rate)+ Depreciation and amortization+ Deferred taxes- Capital expenditures- Changes in working capital .= Free cash flow
  • 22. EBITDA• EBIT – Trying to get to cash flows independent of the capital structure – Cash flow is an after-tax concept – Must be “normalized” to remove the effects of private company discretionary spending
  • 23. NORMALIZED EARNINGS• Determining Normalized Earnings – Services, charges, collections • A sound valuation must make some determination as to the appropriateness of the billing and coding practices – Reasonable compensation • Benchmark data • Compensation should reflect that of a non-owner • Consider all compensation – Other discretionary spending
  • 24. MORE ON COMPENSATION• Post Transaction Compensation – Charles A. Derby v. Commissioner, TC Memo 2008-45 – Determination of cash flow must be reflective of post-transaction compensation
  • 25. PROJECTED CASH FLOW• Capitalization of Cash Flows – Current operations are indicative of future operations• Discounted Cash Flows – Future operations are expected to be substantially different from current operations
  • 26. CAPITALIZATION RATE• Build Up Method – Risk free rate of return – Conversion of fixed income to equity security – Industry and company specific risk factors – Less a growth rate (remember it‟s healthcare) This is really a discount rate minus a growth rate
  • 27. DISCOUNT RATE• Weighted Average Cost of Capital – Reflects the anticipated capital structure
  • 28. COMPUTING THE VALUECapitalization of Cash Discounted Cash Flows:Flows: Projected earnings streamAverage historical until stabilizedearnings (simple or (remember, it‟sweighted) healthcare) Capitalization rate Compute terminal valueValue for last year Present value each year by discount rate Sum = Value
  • 29. OTHER CONSIDERATIONS• How to allocate purchase price• Non-compete agreements• Medical records• Goodwill
  • 30. ASSET ALLOCATION• How to divide the purchase price?• Sum of the parts must equal the whole• Identify assets, including intangible assets and those that don‟t appear on the books• Start with most liquid assets first• Work towards most illiquid• Residual is goodwill
  • 31. NON-COMPETE• Non-Competition Agreements – Complete valuation of business – Estimate probability of competition in each year of forecast – Prepare alternative valuation assuming seller competes; estimate profits attributable to seller – Compute present value – Present value of probability adjusted difference is value of covenant
  • 32. MEDICAL RECORDS• Rarely show up as an asset on the balance sheet• Considerable value• How to value?• Further complication – EHR
  • 33. GOODWILL• Practice Goodwill vs. Personal Goodwill• Practice goodwill• Personal goodwill• Leading case – Martin Ice Cream Co. v. Commissioner [110 T.C. 189 (1998)]• Why is this important• Interesting caveat – who owns personal goodwill?
  • 34. SUMMARY• Most healthcare related transactions must be at fair market value• Appraisers must be qualified and familiar with healthcare issues and markets• Sanctions are onerous• Constant change requires appraisers to understand healthcare and monitor change
  • 35. QUESTIONSJames P. Sacher, CPASkoda Minotti | CPAs, Business & FinancialAdvisors | Delivering on the Promise.6685 Beta DriveMayfield Village, Ohio 44143Phone - (440) 449-6800Fax - (440) 646-1615Email - jsacher@skodaminotti.comWeb site: www.skodaminotti.com