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More than One Value Definition May Apply

By Dr. David E. Marcinko; MBA, CMP™

By Hope R. Hetico; RN, MHA, CMP™ 

All physicians are familiar with the legal concept of the “standard of care.” However, when it comes to the fair-market-value of a medical practice, healthcare business appraisers generally refer to three other “standards of value”; as defined below. 

The Three Types of Value: 

1. Investment Value

Investment value focuses on a specific physician buyer rather than value to a hypothetical buyer. 

For example, let’s examine the physician owner of an ambulatory surgery center [ASC] who is considering the acquisition of a competing ASC that operates in the same geographic market.  The owner might calculate value based upon the knowledge that the combination of the two ASCs will create economies of scale and less competition. This would result in greater profitability per dollar of revenue. 

Therefore, such a buyer, all else being equal, may assess a greater value to the company than a buyer who would expect to operate the ASC in its current free standing situation, without the expected cost saving and corresponding expectation of increased cash flow.

2. Intrinsic Value

Intrinsic value is similar to investment value however the practice is typically viewed in a stand-alone mode as a going-concern. That is, value is based upon the expected cash flows of the practice based upon its current operating configuration.

However, changes in operating policy, such as changing its financial structure can have an impact on its intrinsic value. 

3. Going Concern vs. Liquidation Value

A medical practice or any business cannot be worth less than its liquidation value. Thus, “liquidation value” sets a floor for value. Liquidation value assumes that a practice’s operations cease and assets are sold either piecemeal or in groups and obligations are satisfied. Liquidation value is generally based on an “orderly liquidation” process where assets are sold in manner to realize the greatest possible value for them. 

In contrast, a “forced liquidation” process is where assets are sold as quickly as possible often through an auction.   

Going Concern Value views a medical practice as a holistic combination of tangible and intangible assets, in which the sum is often greater than its parts.  This synergistic view of the practice is typically what is being valued. 

Conclusion 

And so, what is your experience with the above definitions of medical practice value? Were you even previously aware of them? 

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] www.HealthcareFinancials.com

Speaker: If you need a moderator or a speaker for an upcoming event, Dr. David Edward Marcinko; MBA is available for speaking engagements. Contact him at: MarcinkoAdvisors@msn.com

Filed under: Practice Worth |