Medical practice valuation appraisal

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http://www.medicalpracticeappraisal.com/ Medical practice valuation information and advice by a certified and licensed medical practice valuation professional.

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Medical practice valuation appraisal

  1. 1. Medical Practice Valuationby Keith Borglum CHBCMedicalPracticeAppraisal.com<br />
  2. 2. Why Value a Practice ?<br />Purchase/Sale<br />Associate buy-in<br />Marital Divorce<br />Owner Exit/Breakup<br />Insurance<br />Litigation, non-compete, economic damages<br />
  3. 3. Financial v. Emotional Value<br />People feel “pride of ownership” in their businesses and see “value” in the effort made to start and grow it<br />The market place primarily determines what financial value is represented in the business<br />
  4. 4. Value v. Price<br />Value is an opinion, not a fact<br />Price is negotiated between two individuals each with a unique interest<br />Many practices sell for a price aboveor below the appraised value<br />A practice can have value withouta sales price, as in a divorce<br />
  5. 5. Standards of Value<br />Fair Market Value - to a hypothetical buyer<br />Investment Value - to a particular buyer<br />Fair Value - no buyer involved<br />Liquidation Value - at “auction”<br />
  6. 6. Premises of Value<br />Going Concern - ability to generate income despite aninterruption in ownership<br />Liquidation - income is interrupted,can be “forced” or “orderly”<br />
  7. 7. Components of Value<br />Tangible - furniture, instruments, supplies, accounts receivable, withholds & bonuses, cash, postage, pre-payments<br />Intangible - cash flow, goodwill, location, reputation<br />Liabilities - loans, debts<br />
  8. 8. Approaches to Value<br />Asset - the value of the assembled components, aka adjusted book value, net asset value, accumulation value<br />Income - the value of the benefit stream to the owner<br />Market Comparison - what similar practices sold for<br />
  9. 9. The Asset Approach<br />Rarely used in small to medium sized medical practices, unless low income<br />Rarely used for<50% ownership<br />Rarely used in limited-asset businesses<br />Sometimes used to value young ortroubled businesses<br />
  10. 10. The Income Approach<br />The favored approach by the IRS inRevenue Ruling 59-60<br />Usually favored for operating practices<br />Dividend-paying capacity via net cash flow (the individual’s profit above labor) is commonly used<br />
  11. 11. The Market Approach<br />Compares the subject to prior similar sales<br />The subject’s value must be adjusted to the comparable sales for time, place, facts<br />Typically excludes liabilities, AR and cash<br />
  12. 12. How to Value Goodwill<br />Total value minus tangible assetsor<br />By reportor<br />By calculation<br />
  13. 13. Market Comparison<br />Similar Purpose - sale, buy-in, or divorce<br />Size of practice by collections/group size<br />Method of valuation used in prior transaction<br />Overhead and profitability<br />Year & Place of transaction<br />Some studies include pre-2004 Medicare cuts<br />Some states had short term inflated values resulting in federal litigation<br />
  14. 14. Valuing Tangible Assets<br />Fair Market Value under a Premise of Going Concern considers the used valueassembled in place.<br />NOT liquidated auction value<br />NOT depreciated tax value<br />USUALLY excludes accounts receivable, cash and cash equivalents, and assumes liabilities will be paid-off<br />
  15. 15. Market Value Summary<br /> Must adjust subject value toparticulars of the historicvalue of sold practices.<br />
  16. 16. The Income Approach - Issues<br />Best values the income stream above themarket-compensation of owner (ie “dividends”)<br />Does not differentiate between tangible assetsand goodwill<br />Requires an opinion of specialty future growth rate, not historic practice growth rate<br />Requires an opinion of market-rate risk and return<br />
  17. 17. The Income Approach - Normalizing<br />Owner’s income must first be “normalized” to include benefits like:<br />Auto & Entertainment<br />Health, life, and disability insurances<br />Exotic-locale Continuing Education<br />Owner’s salary plus profits<br />Pension and profit-sharing contributions<br />Usually uses pre-tax rather than after-tax earnings<br />
  18. 18. The Income Approach - Risk<br />Small medical practice is high risk and requires high returns on investment<br />Start with 20 year treasury bonds <br />Add risk for S&P 500<br />Add risk for small size<br />Add industry and specialty risk<br />Add specific practice risk<br />= Practice Risk ROI needed (“cap” rate)<br />
  19. 19. Income Approach Summary(simplified)<br /> Normalized Income<br /> - Market Rate Compensation<br />x Growth Rate<br />/ Cap rate<br />= Fair Market Value<br />
  20. 20. Asset Value<br />If Income or Market Approaches indicate a value of less than the value of the assets, then use Asset Value as “highest and best”.<br />If it is a going concern, use fair market value of the tangible assetswithout a cost of liquidation<br />
  21. 21. Reconciling Value<br />The values found by different Approaches usually differ from each other.<br />You must apply logic, reason, and experience to then find a single value, or range of values.<br />
  22. 22. Reconciling Value - Example<br />
  23. 23. Common Appraisal Errors<br />Failure to normalize income properly<br />Incorrect market compensation, failure to considerfull-time-equivalence schedule<br />Failure to consider medical issues like Medicare planned payment reductions or capitation impacts<br />Using after-tax instead of pre-tax income<br />Unsupported cap rate/ risk too low<br />Using divorce comps for sales transactions, or unadjusted Goodwill Registry medians<br />
  24. 24. Critical Valuation Error<br />Not applying a discount for a minority interest in many (not all) cases<br />Full value requires “control”<br />Lack of control creates a discount disproportionate to the reduced interest<br />49% of a $1,000,000 corporation may have a value near zero<br />The 51% owner can do anything they please with the company and assets<br />
  25. 25. Choosing an Appraiser<br />Should be member of a legitimate appraisal association like IBA or ASA, and follow industry standards for reports, like USPAP<br />Should specialize in healthcare –most appraisers either do mostly/only healthcare, or none at all<br />There are levels of appraisal- choose the right level for your purpose<br />If you need a practice broker, use a licensed broker, even just for advice.<br />
  26. 26. Summary: What is a Practice Worth?It all depends on the facts!<br />
  27. 27. Keith Borglum CHBCCertified Healthcare Business ConsultantLicensed Practice Broker & AppraiserFaculty or Consultant for many Medical Associationsmore info and CV atMedical Practice Appraisal.com<br />You wouldn’t refer to an “unlicensed doctor”.<br /> So don’t use an unlicensed, uncertified “consultant”!<br />

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