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Key Issues in Healthcare Entity Valuation and Appraisal
By Robert James Cimasi; MHA, ASA, AVA, CBA, CMP™
The Premise of Value under which any healthcare entity fair market valuation is conducted is an assumption further defining the Standard of Value to be used.
The Premise of Value defines the hypothetical terms of the sale and answers the question, “Value under what further defining circumstances?” Two general concepts relate to the consideration and selection of the Premise of Value, i.e., “value in use” and “value in exchange.”
Value in Use
Value in use is that premise of value that assumes that the assets will continue to be used as part of an ongoing business enterprise, producing profits as a benefit of ownership.
For example, in valuing the assets of a surgical hospital, the valuator must determine whether it is appropriate to value simply the tangible assets, or if it is appropriate to consider the enterprise as a going concern and incorporate the potential value of intangible assets. Orderly liquidation value involves assuming that the equipment is sold, perhaps separately, over a reasonable period of time. Forced liquidation assumes that the equipment is sold as quickly as possible to the first bidder.
Value in Exchange
Value in exchange is often referred to as “liquidation value.” Liquidation value describes a sale of the assets of a business enterprise under conditions other than its continued operation as a going concern.
The liquidation can be on the basis of an orderly disposition of the assets where more extensive marketing efforts are made and sufficient time is permitted to achieve the best price for all assets, or on the basis of forced liquidation where assets are sold immediately and without concern for obtaining the best price.
Liquidation
Of course, costs of liquidation should be considered in the value estimate when using this premise of value. Shortening the investment time horizon may have a deleterious effect on the valuation of the subject entity as it presents a restriction on the available pool of buyers and investors and the level of physician ownership, as required under the standard of Fair Market Value.
Assessment
Do the dual issues of value premise and time horizon still seem logical in modernity; why or why not? How comfortable are you that a reasonable FMV can be determined for any healthcare entity after passage of The Patient Protection and Affordable Care Act in March of 2010? Please comment and opine.
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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:
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- HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
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- ADVISORS: www.CertifiedMedicalPlanner.org
- FINANCE: Financial Planning for Physicians and Advisors
- INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
- Dictionary of Health Economics and Finance
- Dictionary of Health Information Technology and Security
- Dictionary of Health Insurance and Managed Care
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Filed under: CMP Program, Health Economics, Practice Worth | Tagged: fair market value, FMV, healthcare appraisal, medical practice valuation, Robert Cimasi, Value in Exchange, Value in Use, www.certifiedmedicalplanner.com, www.healthcarefinancials.com |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Are Some FAs Delusional Regarding the FMV of their Practice?
Mark Hurley says they are because they believe their firms are very valuable–but most aren’t
http://www.financialadvisormagazine.com/component/content/article/5722.html?magazineID=1&issue=148&Itemid=73
Are some Financial Advisors getting to be more like doctors in this regard?
Mike
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Medical Practice Valuation
Great article. A medical practice may be one of your most valuable assets, making the accurate determination of its value especially critical. Why rely on unsubstantiated rules of thumb, gross multipliers, and inaccurate comparable transactions to determine value? You should contact a certified healthcare business consultant before making any major decisions regarding the future of your practice.
Scott
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How to Review A Valuation Report
[Answer: Yes OR No]
Does the report contain the following minimum criteria?
1. A clear description of the assignment
a. The assets being valued
i. A description of the company or partnership
ii. The size of the holding
iii. The restrictions or rights attached to the asset
b. The purpose and intent of the valuation
c. The valuation date(s)
d. The standard of value being used (e.g., fair market value, fair value)
2. A description of:
a. The business
i. The form of the business
ii. The history of the business
iii. The business’s products and/or services, markets, and customers
iv. The company’s management
v. The company’s major assets, tangible and intangible
b. The industry and the economy
i. Outlook for the economy and the industry
ii. Sensitivity to seasonal or cyclical factors
iii. Competition
3. Financial analysis
a. Analysis of the company’s financial statements
b. Adjustments to financial statements with explanations
c. Assumptions used in preparing projections
d. Comparison of company’s performance relative to other companies in its industry
4. Valuation methodology
a. Description of methodologies used and discussion of reasons for using them
b. Description of uses of discounts
c. Discussion of how capitalization rates and multiples of earnings were determined and used
5. Assumptions and limiting conditions
a. Statements of fact are true and correct
b. The valuation is the appraiser’s personal, unbiased, professional analyses, opinions, and conclusions
c. Statement by appraiser that he/she has no personal interest in the property being valued
d. Statement by appraiser that he/she relied on information supplied and did not verify it beyond that
e. Valuation report is valid for the valuation date and purpose only
f. Contingent on the outcome of the valuation
Does the report contain a logical progression leading to a conclusion?
Is the report signed by the appraiser?
Does the report include the credentials of the appraiser?
Dr. David Edward Marcinko MBA
[Editor-in-Chief]
http://www.CertifiedMedicalPlanner.com
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Health Valuation Seminar
ASA’s HSIG advanced healthcare valuation course session will be held in Chicago IL, on Friday April 24th, and Saturday April 25th, 2015.
ASA HSIG Chair, and ME-P expert, Robert James Cimasi ASA CMP, has announced that faculty headliners for this two-day, in-person educational course feature renowned experts in the fields of health policy, health law, and health economics.
Included in this course session is a personal copy of the two volume course textbook, entitled, “Healthcare Valuation: The Financial Appraisal of Enterprises, Assets and, Services,” by Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA (John Wiley & Sons, 2014).
To register or for more information visit http://www.appraisers.org or call (800) 272-8258.
Thank you in advance for sharing this information.
Alison Ho
[Marketing Assistant]
American Society of Appraisers
11107 Sunset Hills
Suite 310
Reston, VA 20190
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