Key Principles For Assessing Practice Value
- Volume 21 - Issue 12 - December 2008
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Therefore, almost every competitive issue that impacts value should be addressed with each practice engagement. This includes but is not limited to:
• contemporary dislocations by third
parties, Medicare and commercial payers;
• retail clinics and changes in supply/ demand and specialty trends;
• the rise of ambulatory surgery centers, walk-in clinics and specialty hospitals;
• outsourced care and medical tourism;
• alterations in resource based-relative value units, ambulatory payment classifications (APCs), diagnosis-related groups (DRGs) and newer Medicare-severity diagnosis-related groups (MS-DRGs); and
• the Medicare Modernization Act, HIPAA, OSHA, the EEOC and other regulations.
One must also consider the impact of current employee trends to high-deductible health care plans and private concierge medicine. Another considferation is employer shifts away from defined benefits plans to defined contribution plans.
Aggregating Or ‘Normalizing’ Financial Information: What You Should Know
In addition to possibly conducting employee interviews, one must gather appropriate financial information in order to properly value a practice. As a starting point, interested physician buyers should be able to see the following information for the most recent three-year period.
• Practice (corporate) tax returns
• Equipment/automobile leasing and/or tax depreciation schedules
• Accounts receivable aging schedule
• Consolidated financial statements (P&L, cash flow, balance sheet and retained earnings) for the practice
• Prior buy-sell and/or non-compete agreements
It is especially important to eliminate one-time, non-recurring practice expenses. These are adjusted for excessive or below normal expenses on the profit and loss statement. Such “normalization” can produce a big surprise for benchmark proponents and formula-driven advocates when a selling doctor runs personal expenditures through the practice that a buyer or court would not consider legitimate. Of course, one is less likely to encounter such shenanigans when the valuation is conducted according to professional USPAP and IRS style guidelines.
For example, we recall one doctor who painted his home and wrote it off as a valid business expense. Deleting other major expenses such as country club memberships make a practice look more profitable. This is good news if you are selling it. It is bad news if you are getting a divorce.
Conversely, you may have to defend legitimate business expenses that an appraiser may seek to normalize. For example, doctors may pay for a vehicle through their practice. If they use the vehicle to travel between multiple offices and hospitals, the expense may be legitimate.
Also realize that the appraiser may also add expenses that have not been incurred. For example, the appraiser may add an office manager’s salary if your spouse is in that role for free. This produces a lower appraised value and is common in small podiatry practices. Honorarium is another example that does not figure into value calculations.
Of course, normalization is a sophisticated and time intensive process. However, the expert earns his or her professional fee, and defends the resulting valuation range when challenged.
Keys To Selecting The Right Valuator
The most important credentials to look for are fiduciary level experience, specificity and independence. Some doctors mistakenly turn to those who may have never appraised a practice before. Just because an appraiser has initials behind his or her name, it does not mean he or she understands the peculiarities of medical specialties, especially podiatry. Agents, brokers, solicitors and other intermediaries are not fiduciaries.
We believe that physicians looking to assess a practice for possible sale/purchase should only select an independent health economist, who will be your advocate under Securities Exchange Commission (SEC), IRS or other relevant managerial accounting guidelines.