Valuation Strategies for Physicians' Practices

May 31, 2012
James Doulgeris

Here are three established valuation approaches to take the guesswork and emotion out of looking at your medical practice.

Whether you are buying, selling, entering into a partnership or taking on a new partner, or just want to get a baseline value for the future, using one of three established valuation approaches takes the guesswork and emotion out of the equation.

Here is a brief description of the primary components of each approach and related tax, Stark Law, and Anti-Kickback Statute considerations:

Book Value, or Balance Sheet, Approach

Aggregating the value of the assets, and netting the liabilities of the practice, indicates the value of the equity in the business.

• Identify and adjust the reported value of tangible assets and liabilities to the IRS definition of Fair Market Value (see below). Assets less liabilities equal the book value.

• This approach does not usually take into consideration personal and professional goodwill.

Income Approach

This valuation method directly relates the value of all future cash flows or earnings that the practice can reasonably be expected to produce.

• The Discounted Cash Flow Method is the most common application of the income approach in the valuation of physician practices. Revenue and expenses are projected over reasonable periods of time.

• The Single Period Capitalization Method is another method where an analyst determines a base level of annual earnings and then determines a multiplier appropriate to that earnings expression.

• Income approach requires identification of a normalized cash flow on a stand-alone basis.

• This approach uses a standard MGMA Survey and other benchmarking tools.

Market Approach

Determining the value of the practice leverages a variety of methods that compare the subject with transactions involving similar practices.

• Goodwill Registry is a good source of comparable transactions for the medical community.

• This method should not be used if the appraiser cannot obtain current transaction data.

• A qualified, professional, independent party is required appraise the practice’s value.

• After valuation, the seller should have a good idea of the true value of the practice’s tangible and intangible assets, including the value of the property owned, accounts receivable, and the perceived value to the community and their referring physicians.

• Different valuation guides can be used as guidance including, but not limited to the:
     • MGMA Survey
     • AMGA Survey
     • Sullivan-Cotter Survey
     • American Society of Appraisers Business Valuation Standards

General Rules for Valuation and Purchase

• Obtain written documentation based on the current data.

• Valuation should reflect (have adjustments for) physician compensation, benefits, family members, one-time expenditures, etc.

• Income and market approaches should incorporate working capital adjustments.

• A qualified, independent third party appraiser should conduct the valuation.

• IRS Fair Market Value and fraud and abuse law compliance is a must.

• In all cases, care must be taken to comply with and meet Anti-Kickback, Safe Harbor and Stark Law employment exception or Fair Market Value exception regulations.

Fair Market Value (FMV) Definitions

IRS defines FMV as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” Excess payment may result in an IRS determination of private inurement or impermissible private benefit.

Stark Law defines FMV as: “The value in arm’s length transactions, consistent with the general market value, means the price that the assets would bring as the result of a bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, on the date of the acquisition of the assets. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of the acquisition, where the price has not been determined in any manner that takes into account the volume or value of anticipated or actual Medicare/Medicaid Designated Health Services referrals (as defined below) by physicians of the Practice to the entity that employs them or to other related entities.”

Anti-Kickback Statute defines FMV as: “Where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals.”

Important Notice: Only your financial advisor can guide you as to which is the best approach for your situation and provide tax advice appropriate for you. This article provides general information only, does not provide financial or tax advice, and must not be relied upon for those purposes.

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