Seven Reasons To Appraise Your Practice
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. When Your Practice Or Family Situation Changes 4. Buy-sell agreements. Ideally, physician partners should put a buy-sell agreement in place when they have an amicable relationship. This establishes the terms for departure before they are required and is akin to a prenuptial agreement in a marriage contract. Disagreements most often occur when a doctor leaves the group and they are often acrimonious. This may contribute to a decline in the operations of the practice not to mention the morale of partners and employees. Feuding factions can spill over into the office and the practice begins to implode, creating a downward equity spiral. Therefore, it is smart to obtain valuations of the practice every two to three years or as the economic circumstances of the practice change. This enables you to get an independent, credible assessment without any emotional overtones. 5. Disputes over physician partnerships. Medical practice appraisals are often used in partnership disputes such as breach-of-contract or departure issues. Obvious revenue declinations are not difficult to quantify. However, revenues may not immediately fall since certain CPT code reimbursements may actually increase. However, upon verification, lost business may be camouflaged as the number of procedures performed or the number of patients decreases after a partner’s departure. 6. Divorce proceedings. Physicians who are getting divorced should get a practice appraisal. Either side may hire the appraiser although a court will occasionally order an expert to provide a neutral valuation. Undertake such valuations in light of both court discovery rules and IRS requirements for closely held businesses. Generally, this requires consideration of the following eight elements: practice specialty and operating history; economic and healthcare industry condition; estimates of practice risks and future returns; book value and financial condition of the practice; practice future earning capacity; physician bonuses, dividends and distributions; intangible assets; and comparable practice revenue. Sometimes, a spouse may even desire a lifestyle analysis by a forensic accountant or appraiser in order to evaluate the potential for underreported income. A family law judge is often the final arbiter of different valuations and because of varying state laws, there may be 50 different interpretations of what the practice is really worth. Ensuring The Growth Of Your Practice 7. An ingredient for additive value and organic practice growth. Not infrequently, medical practice appraisals can add value where little actually exists or, more importantly, add value where it is not obvious or readily apparent. For example, some doctors may believe their practice is worth more than it actually is in the modern climate. Upon appraisal, they are devastated and can’t understand the reasons for its minimal value. Consultants can work to leverage practice assets to greatest advantage. For example, they may suggest … • identifying tasks that require less labor; • the outsourcing of human resources; • dropping service line segments according to CPT code reimbursement rates; • using paraprofessionals as substitutes; and/or • automating office processes to increase profits. Even successful practices can use periodic valuations as an ingredient for future growth. Some basic concepts to grow a medical practice through additive value measures include: establishing goals and a time frame; having a strategic plan; addressing financial issues early; and remaining flexible and responsive to changes in health care. How To Find Qualified Medical Practice Appraisers Finding a qualified medical practice appraiser is not always an easy task. Your office accountant may not be familiar with the current managed care environment, the specifics of your medical specialty or even fair market value concepts in health care. Please consider the following guidelines when looking for an appraiser. • Make sure appraisers use generally accepted IRS methods and have a proven track record with the government for medical appraisals. • Make sure the valuation is written, substantiates medical practice value, provides detail to support conclusions and is signed by the appraiser. • Avoid conflicts of interest. Seek an unbiased and independent viewpoint. Buyer and sellers should each have their own independent appraisal done, using similar statistics, accounting measures and economic assumptions. • Make sure the appraiser will qualify as an expert witness and is presentable on the witness stand, if needed. • Request references and examples of previous medical practice appraisals. • Inquire about experience in publishing, speaking and the teaching of professional medical practice valuation techniques. The Uniform Standards of Professional Appraisal Practice (USPAP) promulgates standards that provide the minimum requirements to which all professional appraisals must conform. USPAP requires appraisers to consider the three recognized approaches to value (the income, market and cost approaches) in order to assess the worth of a practice. In Conclusion Market pressures are motivating physicians to be proactive to make informed decisions concerning the future worth of their practices. Appraising your podiatry practice on a regular basis can play a key role in obtaining maximum value for your practice. Dr. Marcinko is a healthcare economist, valuation specialist, Certified Financial Planner and Certified Medical Planner. He is also the Academic Provost for www.MedicalBusinessAdvisors.com, a practice enhancement resource center for physicians and their business consultants. Dr. Marcinko can be reached at (770) 448-0769 (phone), (775) 361-8831 (fax) or via e-mail at firstname.lastname@example.org.