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In-Situ “Walk-Through” Often Essential for Proper Valuation

Staff Reporters

Introduction 

The most effective means for any valuation professional to confirm his or her understanding of medical business value, and how internal controls over financial and managerial reporting are designed and operated in a practice, is to evaluate and test its effectiveness, in-situ.

Purpose of the Visit 

The purpose of an office “walk-through” includes making inquiries of and observing the personnel who actually perform managerial duties and controls; reviewing documents that are used in, and that result from, the application of these controls; and comparing supporting documentation to the accounting records.

In a walkthrough, valuation professionals may also examine and review transaction in a medical practice management information system to the point where it is reflected in the practice’s consolidated financial reports.

But, an appraisal is not a forensic auditing process; nor does it track each and every source document; etc. 

Evidence of Value 

Walkthroughs also provide the valuator with evidence to: 

• Confirm an understanding of the medical process flow of transactions.
• Confirm an understanding of the management and design of valuation components related to the prevention or detection of fraud, over utilization, excessive expenses or salary, etc.
• Confirm an understanding of the office workforce process by determining whether points in the process at which misstatements related to each relevant financial statement assertion that could occur have been identified.
• Evaluate the effectiveness of the design of controls and office management.
• Confirm whether office controls have been placed in operation. Of course, an onsite walk-through is the premier component of any comprehensive medical practice valuation engagement.  

When A Visit is Not Needed

If the purpose of the appraisal is for estate planning, for a buy-sell agreement, to sell the practice or for some other non-litigious purpose, then a site visit may be omitted and the cost will be sharply reduced.

However, if litigation is a strong possibility (as in a divorce, case of potential fraud or business dissolution), then it may be prudent to have the appraiser physically inspect the practice.   

Be sure to ask if the cost of your valuation includes a site visit.  Travel and lodging is not cheap and valuations that include an onsite visit will typically cost thousands of dollars more.

Conclusion 

Since there is as much valuation “art” as fair-market accounting “science” in the medical practice valuation and appraisal process; be sure to hire a knowledgeable and medically focused appraiser who’s best for your specific situation.

And so, what is your experience with the practice appraisal process? Have you ever bought, merged or sold a medical practice, clinic or related healthcare entity?

NOTE:For comprehensive institutional information on this topic, please subscribe to our premium, 1,200 pages, 2-volume quarterly print subscription guide: Healthcare Organizations [Financial Management Strategies]. And, be sure to visit: www.HealthcareFinancials.com

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

Filed under: Practice Worth |