Seven Reasons To Appraise Your Practice
- Volume 17 - Issue 8 - August 2004
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Assessing the value of your medical practice is an investment in your practice’s future. Not only does it help build equity value, it would be shortsighted not to have a professional appraiser working with you to understand the key issues involved and the reasons for them. After all, it is very easy in the emotion of buying or selling a practice to make a mistake, especially in a changing environment and niche specialty like podiatry.
Don’t wait to have your practice appraised. There is a tendency to contact professional appraisers retroactively during valuation disputes or when sales, partnerships or practice purchases are well under consideration. By this time, it is too late to maximize value since no magic meters exist that can quickly build marketplace equity into a practice.
With this in mind, let us consider seven proactive reasons for seeking regular appraisals of your practice as they are most helpful when building equity value over time.
How Valuation Can Lay
Groundwork For The Future
1. Confronting the urge to merge and survive. There are approximately 12,000 podiatrists in the United States and most are solo or small group practitioners. This fragmentation helped managed care organizations demand significant reductions in provider payments.
Aging doctors are retiring, mid-life doctors are stressing out and newly minted physicians are desperately seeking to retain one last vestige of business autonomy. Federal and state regulations have also had a significant impact on medical practices. Declining incomes, increasing overhead costs (see the chart below) and increasing administrative challenges now motivate doctors to sell their practices, join hospital systems, align with corporate partners or merge with larger groups to form even regional groups. There are countless merger and consolidation models, some of which are successful while others struggle.
Undoubtedly, this evolution will continue as these group affiliations offer more adaptability than solo practitioner models to ever changing healthcare market needs.
2. Meeting your practice’s legal needs. Practice appraisals are often required for legal reasons such as bankruptcy, breach of contract, the determination of stock options and/or minority shareholder complaints. In 2002, the Financial Accounting Standards Board (FASB) issued rules requiring certain intangible assets to be valued. This may be important for practices seeking start-up capital, service segmentation extensions or operational funding.
3. Estate planning. Medical practice valuation may be required for estate planning purposes. For a deceased physician with a gross estate of more than $1.5 million, his or her assets must be reported at fair market value on an estate tax return. If one receives lifetime gifts to one’s practice, it is generally wise to obtain an appraisal and attach it to the gift tax return.
In addition, one should realize the following price discounts/price premiums may apply in any case:
• Practice appraisal discounts. A discount may be applied to a podiatry practice valuation when there is no ready market for such interest as in the case of a small town community, specialty provider or niche market. If the interest is not controlling, then a minority discount or lack-of-control discount may be appropriate. One may even use two appraisals to value the practice and to evaluate the discount.
• Control premiums. A control premium occurs when majority practice ownership provides a podiatric executive with the ability to set practice business strategy, hire and fire employees, accept and reject managed care contracts, and/or determine compensation among other things.
• Reverse practice appraisal premiums. On the other hand, the IRS may disallow a minority interest discount and instead apply what is known as a swing vote premium (SVP). For example, if a 20 percent interest in a three physician practice is being valued and there are two other physician shareholders who each own 40 percent, the fair market value of the 20 percent interest may have significant and valuable controlling aspects, which suggest the application of the SVP.