Key Principles For Assessing Practice Value

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By David Edward Marcinko, MBA, CMP, and Hope Rachel Hetico, RN, MHA, CMP

   Moreover, be very wary if the valuation is not done in an independent manner or, worse, performed for both parties simultaneously.

Essential Insights On Professional Fees And What You Can Expect

   Of course, it is almost impossible to answer concerns regarding fees without specific information. The cost of a valuation can range from $0 to $50,000 for an onsite team of experts for behemoth practices and ambulatory surgery centers. Keep in mind that in most cases you want to ensure the value determination will stand up to IRS scrutiny so the $0 rule of thumb approach is not an option.

   However, most reputable firms use a blended fee schedule of fixed and hourly rates (plus expenses). Podiatrists should expect to spend approximately $5,000 to $10,000 for an average sized practice and a limited appraisal that is completely suitable for most internal activities.

   External appraisals or poorly aggregated financial information, onsite reviews and litigation support services incur additional costs. However, most doctors find the money well spent. Expect to pay a retainer and sign a formal professional engagement letter.

   Finally, once the practice price is agreed upon, sales contract terms and agreements present a plethora of financing challenges for both parties to consider. For example, one must negotiate bank loans (if they are even available), payment rates and length, personal promissory guarantees, down payment offsets, earn-out arrangements and Uniform Commercial Codes.

Final Notes

   Do not be surprised if a sales broker does not consider the aforementioned issues as the modern health era emerges. Most agent-appraisers are predominantly concerned with earning commissions by working both transaction parties and may not represent your best interests. Also be aware that they are usually not obliged to disclose conflicts of interest and do not provide testimony as a court approved expert witness.

   However, it is a fait accompli that medical practice worth is presently deteriorating. As the population ages and third-party reimbursements plummet, doctors are commoditized and traditional retail medicine is replaced by more efficient wholesale business models like workplace health clinics. The recent subprime mortgage default fiasco, credit freeze, potential tax reform law expiration and the political specter of a nationalized healthcare system only add fuel to the macroeconomic fires of uncertainty.

   As a result, a good medical practice is no longer good business necessarily and retiring doctors can no longer automatically expect to extract premium sales prices. Moreover, uninformed young physicians should not be goaded to overpay.

Dr. Marcinko is a nationally known speaker and the founding partner of www.MedicalBusinessAdvisors.com. He is also the Academic Provost for www.Certified MedicalPlanner.com and is the Editor-in-Chief of www.Health CareFinancials.com.

Ms. Hetico is a Visiting Adjunct Professor in health care administration for the University of Phoenix Graduate School of Business Management in Atlanta. She is the Managing Editor for www.Health DictionarySeries.com and a Senior Educational Advisor for www.PodiatryPrep.com.
The authors acknowledge the assistance of Rachel Pentinmaki, RN, MHA,CMP and Mackenzie H. Marcinko in the preparation of this article.

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Keith Borglum CHBC CBBsays: June 12, 2013 at 10:23 pm

As a healthcare practice appraiser and broker myself, I agree with much of what Dr. Marcinko states, but not all of it. I expect this would not be surprising to him since he acknowledges that appraisers often disagree.

Many of us healthcare appraisers believe that the Discounted Cash Flow method is no longer the most relevant income approach in small professional practices, due to the impossible requirement to predict future reimbursement in healthcare, year-by-year, for years in advance. To quote Gary Trugman, CPA, a leading author on the topic and faculty for the course for appraisers Valuing the Very Small Business: “Attempting to use a discounting model for a very small business would be like throwing darts at a target from six miles away. There is no way you can hit the target.”

I also dislike the Excess Earnings Method for small professional practices, even though some courts still require it so I then have to include it. Judges don’t always make the right decision. That’s why we have higher courts. The IRS now appears to agree per IBA News, Jan 2011: “The IRS disapproves of the use of the EEM in its Appellate Conferee Valuation Training Program. Moreover, RR68-609 approves of the EEM ‘only if there is not a better basis available’ ”.

Personally, I prefer the Single Period Capitalization Method espoused and taught by the Institute of Business Appraisers. I also prefer to calculate capitalization rates rather than using rules of thumb like “divide by 20%”. I think 20% is too low a risk number for calculating cap rates in today’s healthcare market, resulting in an inflated value.

I disagree that the age of the doctor has impact in determining the “market rate of compensation." I believe that skills, services-mix, productivity and the market are what count, irrespective of one’s age.

I think that the Goodwill Registry does have some worth in calculating the value of a podiatry practice. It is not an “older source” in that its data is not current. It is older in that it has been around longer. Its data is added to annually. True, podiatry is underrepresented therein but it does provide perspective of the overall trends in the U.S. market of values of insurance-based surgical and non-surgical practices. It can be easily misused by the uninformed reader, for example, limiting consideration to its one component of value as a percentage of revenues. Obtaining the underlying database provides many more insights into sales prices as ratios of earnings, regionalization, currency and size. I wish more podiatrists and their advisors would submit transaction data to make the registry more robust in podiatry.

I am a licensed broker and appraiser. I disagree with Dr Marcinko that brokers cannot be fiduciaries. I also think that they often should not and cannot be fiduciaries, and that they should be entirely independent in their opinions, such that they have no bias to either the buyer or seller. In those cases, then one can perform an appraisal for both the buyer and seller together, even if they are a broker. A good example of this is when I am selected by a court mediator or arbitrator, and my opinion is for the court, not for the parties involved, even if I am also engaged to broker the practice.

Expressing bias for the buyer or seller, or parties to litigation, is an ethics violation in a Fair Market Value appraisal. When I perform a valuation, I find the same number no matter who pays me. I get paid in advance to eliminate any possibility that the client can influence my opinion by withholding payment. When I broker a practice, I am usually on an hourly fee rate rather than a commission, I never negotiate on behalf of the parties, and always have both parties represented by independent healthcare transaction specialist attorneys for individual advocacy, and state and federal compliance of documentation. That said, I agree that not all appraiser-brokers practice the way I do, and every profession has its share of scoundrels, and conflicts of interest can occur.

I caution readers to not confuse “value” with “price." A practice can have value without having a buyer, for example, in divorce or a location undesirable to the current crop of candidates. Value is an opinion based on a set of assumptions. Price is the result of negotiation between two specific parties, each with their own needs.

Best wishes.

Keith C. Borglum
Certified Healthcare Business Consultant
Licensed and Certified Business Broker specializing in healthcare since 1983
Author and Faculty to many medical associations and publications

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