Home / Medicine & Business / What is my practice worth?

What is my practice worth?

By Greg Reardon.

The answer is: it depends. Value truly can be said to rest in the eyes of the beholder. Not only do the intended motives of the buyer and the seller influence this answer, but so too do the objectives of each of the respective players.

Why is that?

Let’s explore what influences the answer to this question so that the next time your partner, a prospective partner, a prospective buyer, the IRS, or a disgruntled spouse calls the question, you’ll be better able to respond.

The first question to answer might be the type of value that is being contemplated. That might be any one of the following values that drive the question:

· Fair Market Value.

· Intrinsic Value.

· Liquidation Value.

· Replacement Value.

· Insurable Value.

· Loan Value.

· Book Value.

· Special Contract Value, etc.

Clearly, the type of value that is being considered depends upon the purpose for which the valuation is to be used. For many physicians, when a valuation is deemed to be required, the value sought in a valuation is “Fair Market Value.”

Each type of value (termed standard of value in the professional jargon) has its own definition.

Fair Market Value is one of the most often used standards of value, and is typically defined along the lines of IRS Revenue Ruling 59-60. However, since its adoption in 1959, the term Fair Market Value has been expanded upon by the International Glossary of Business Valuation Terms to read: “The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

This represents a collaborative effort among the recognized valuation societies and organizations: National Association of Certified Valuation Analysts, American Society of Appraisers, American Institute of Certified Public Accounts, and the Canadian Institute of Chartered Business Valuators.

Another standard of value is Intrinsic Value, which is defined as: “The value that an investor considers, on the basis of an evaluation or available facts, to be the ‘true” or ‘real’ value that will become the market value when other investors reach the same conclusion.”

Intrinsic Value possesses certain synergistic attributes that adds value to the parties, which typically exceeds that of Fair Market Value, owing to these unique synergistic attributes.

Intrinsic Value can be thought of as the price at which an equity interest would change hands between a willing buyer and a willing seller aware of a “unique motivation,” with both the buyer and the seller fully aware of the economic impact of the association of the buyer and seller, and with the buyer seeking to maximize and the seller seeking to leverage off of these prospective economic effects of the association. [First postulated by Robert F. Reilly as Acquisition Value in Healthcare Management Review, 1990 15(3), 25-34, Aspen Publishers, Inc.]

What kind of attributes or synergies, you ask?

One example would be an existing employed junior physician who is contemplating a buy-in to an equity position with the practice that employs him/her. Certainly, if he or she is already established within the community – owns a home within the community, has children in school with established friendships, etc. (you can see where this is going) – this opportunity may be worth “something” greater than Fair Market Value to him or her just because of these and/or other attributes that “enhance” this specific opportunity for him/her over the market of all other opportunities available to him/her.

To the seller (here we assume the practice), the objective is to find the “sweet-spot” that maximizes their (the seller’s) return for ceding a portion of their equity to the junior member without being “unfair” (of course a relative term that calls out ” to whom?). To junior, this value has a ceiling whereafter the synergies offered by the practice vaporize when the price exceeds price X. Getting to price X, then, can become the objective of all parties (i.e., let the negotiations begin).

You can think of these values as being represented on a value-line graph, where Fair Market Value appears about half way between Liquidation Value and Intrinsic Value at the other extreme. Hence, it becomes clear that the “Standard” of value becomes a significant factor in setting the bar for the value sought.

Why then do so many people use Fair Market Value when discussing valuations?

One simplistic answer is that it appears to be at the midpoint or “convergence” of all value propositions. Another is that most compliance regulations require that the standard of value be “Fair Market Value” because it avoids those synergies (especially potentially violative synergies, such as those that could reward the buyer or seller at the time of sale or through a future relationship that might be influenced by the economic value of future referrals [one or the other]), most of which are problematic under Federal Regulations for Health Care unless the relationship meets one or more of recognized governmental exceptions.

If Value can be negotiated, what are the reasons for having a practice valued?

Some common reasons include:

· Contemplated sale/purchase of a practice.

· Allocation of purchase.

· Determination of loan value.

· Buy-Sell Agreements.

· Condemnation Proceedings.

· Divorce settlements.

· Estate planning.

· Admission or withdrawal of a partner/member/shareholder.

· Merger or affiliation with other practices.

· Practice Management.

As can be seen, the purpose of the valuation can also impact upon the outcome.

So, why should it matter to me if my medical group is a bona fide group practice under the Stark law?

Two qualified group practice exceptions under Stark allow a practice to include certain otherwise proscribed designated health services within the group’s shared revenue. One of those exceptions under the Stark law for a qualified group practice is the office ancillary services exception.” The other exception for a qualified group practice is the physician services exception which, however, is a far more narrow exception.

The in-office ancillary services exception generally allows medical groups to provide laboratory, radiology, outpatient prescription drugs and certain other designated health services without violating the Stark law.

Consequently, clinical laboratory, radiology and other designated health services would not be able to be considered under the definition of Fair Market Value under the Stark amplifications unless one or more of these exceptions can be met.

What if I am looking to sell my practice to an outside third-party, what then?

The Stark law makes an additional exception for compensation arrangements involving Isolated Transactions, such as a one-time sale of property or a practice.

When admitting a partner to your practice, this exception is typically inapplicable because, among other things, this exception requires that there are no additional transactions between the parties for six months after the isolated transaction, except for transactions specifically excepted under the other provisions of the Stark law and regulations.

If the parties intend to continue to work together (such as partners), this renders this exception inapplicable.

So what about the concept of Intrinsic Value, is it out the door altogether?

The answer is: not exactly. Stark laws and the regulations permit the recognition of certain designated health services in qualified group practices that meet certain specific exceptions. In essence, the group practice exception allows qualifying physician groups to participate in, and economically benefit from, certain streams of income that cannot be shared among physicians or other health care entities that fail to meet those qualifications.

Valuators are less frequently engaged to provide a value to both parties involved in the admission of a new partner where negotiations can serve to call to mind certain synergistic values to the respective players.

Consequently, a valuator may be retained by one side or the other to the negotiations to serve as an advisory member of the team acting as an advocate to assist either the buyer or the seller to better understand the value proposition represented in the negotiations. In such capacity the valuator may be able to assist such party to enable them to better understand where the possible ranges of values represented by their interest falls while allowing them to remain comfortably within the definition of Fair Market Value prescribed by law.

So, the next time you are asked what is the value of your practice, you can truly answer, “It depends.

Greg Reardon is president of Valuation Advisors, Inc. and part of The Reardon Group of Companies based in Glen Mills, Pa.

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.