Documentation for a Medical Practice FMV Appraisal

Office Operations and Processes also Important

By Dr. David Edward Marcinko; MBA, CMP™


To successfully complete a medical practice financial analysis and fair-market valuation [FMV] engagement, the following is a description of the documents that are typically required.

According to Robert James Cimasi MHA, AVA, CMP™ of Health Capital Consultants LLC, most of this information is analogous to that required for the valuation of other types of healthcare service sector entities.

A. Important Documents

  • Historical Financial Statements

Important for identifying key variables and trends for analysis. The consultant should obtain year-end financial statements for a sufficient, relevant period to allow reliable analysis, e.g., the most recent three-five years. If, however, significant changes such as technological upgrades, product shifts, or environmental changes have occurred or the five-year period is not long enough, or too short, to assess the entity’s performance during changes in its business cycle or economic conditions, a longer or shorter period may be needed.

  • Tax Returns

Obtain tax returns to understand the entity’s tax position and to obtain additional accurate financial data. The returns provide a summary of tax policies and elections that affect tax expense and net income.

  • Forecasts and Proformas

Prospective financial information (e.g., forecasts, proformas, and budgets) should be requested to provide an indication of the entity’s opinion of its earnings potential as well as its historical ability to meet projections. This data may be especially useful if the consultant must produce a proforma or valuation of future earnings or cash flows.

  • Legal Documents

The consultant should review all significant legal documents to obtain an understanding of the ownership interests and relationships and to determine if contractual arrangements affect the entity’s operations and overall value. Some of the documents to be reviewed include:

Articles of Incorporation, stockholder, or partnership agreements. These agreements indicate ownership interests and the owners’ rights and obligations. Also, any stock option agreements should be considered. This will help the consultant determine or verify the type of interests involved.

Stock books. Review of these can help the consultant ascertain the relative size of various ownership interests and identify transactions in the entity’s stock.

Existing buy-sell agreements. These may provide an indication of the value of the entity or an ownership interest in it. Such agreements, however, are often structured based on factors other than the entity’s fair market value.

Purchase and sale agreements involving prior transactions of the entity’s stock. These provide indications of the entity’s value and any offers or letters of intent to sell or purchase stock should be carefully reviewed under IRS Revenue Ruling 59-60, which includes “Sales of the stock and the size of the block of stock to be valued” in a list of factors that, “although not all-inclusive are fundamental and require careful analysis in each case.” IRS Ruling 59-60 further requires:

   Sales of stock of a closely held corporation should be carefully investigated to determine whether they represent transactions at arm’s length. Forced or distress sales do not ordinarily reflect fair market value nor do isolated sales in small amounts necessarily control as the measure of value. This is especially true in the valuation of a controlling interest in a corporation. Since, in the case of closely-held stocks, no prevailing market prices are available, there is no basis for making an adjustment for blockage. It follows, therefore, that such stocks should be valued upon a consideration of all the evidence affecting the fair market value. The size of the block of stock itself is a relevant factor to be considered. Although it is true that a minority interest in an unlisted corporation’s stock is more difficult to sell than a similar block of listed stock, it is equally true that control of a corporation, either actual or in effect, representing as it does an added element of value, may justify a higher value for a specific block of stock.

Managed care and other service contracts. Types and numbers of managed care contracts should be reviewed, including whether they are with healthcare maintenance organizations (HMOs), preferred provider organizations (PPOs), or point-of-service (POS) contracts; whether they are on a discounted fee-for-service basis and if so, the size of the discount; whether they include a withhold percentage to only be paid based on quality criteria; or whether they are a flat fee per enrollee (“capitated”). Special terms such as the non-transferability of the contract to a new owner must be noted, e.g., managed care contracts often require that the provider be included on a panel of credentialed providers in order to contract to provide services.

Key doctor and managers’ employment contracts. Such agreements can reveal excess compensation above fair market value or “golden parachute” provisions in the event the business is sold.

Loan and lease agreements. These agreements may contain restrictive covenants, special demand clauses, or working capital requirements that affect the value of the entity. The length and terms of lease agreements is also important.

Documents relating to current, pending, or threatened litigation. These may indicate major contingent liabilities that may affect an entity’s value.

Patent/trademark documents. These documents may indicate the existence of valuable intangible assets. The absence of these documents could indicate the absence of a value consideration claimed by the client.


  • Office operations and Staff

Consultants should also gain an understanding of the entity’s operations and key personnel. This can be accomplished by touring the facilities, interviewing key managers, and obtaining additional operational data. Obtaining enough information to thoroughly understand the entity, its operations, and its environment is the objective. The consultant becomes aware of operational data or contracts that may affect value by reviewing the following types of documents:

Corporate documents, including stockholder and director lists, compensation schedules for officers and directors, schedule of key man life insurance policies and organizational charts.

Operational documents, including practice business plans, brochures, price lists, catalogs and other product information, sales forecasts, data on customers and suppliers, and capital budgets.

Reports of other professionals, including appraisals on specific assets and reports by other consultants.

Other internal information, including documents or details relating to potential public offerings for debt or equity, venture capital prospectus or similar information, and tracking of incurred but not reported (IBNR) expenses.

  • Loan Agreements

The medical practice may have loaned or borrowed funds from affiliates. Such loan arrangements may require adjustments to be made to the economic value of the subject entity.

Uncollectible loans receivable should have been written off.

Collectible loans receivable may still be considered non-operating assets and evaluated separately.

Loans payable to related parties may be structured as demand notes, but there may be little chance that such loans will be repaid. Such loans may be considered either long-term debt or a form of owners’ equity.

B. Site Visit / Interview Information

The following types of information specific to the medical practice should be gathered by the financial executive or healthcare consultant. This information may be obtained through an interview, questionnaire, or preferably a site visit.


  • Background Information

Include such information as the number of years the entity has operated at its current location and in the community, as well as the office hours.

  • Building Description

Include the location (urban/suburban), proximity to hospitals and other medical facilities, and its size, construction, electrical and computer wiring, age, access to parking, and so on.

  • Office Description

Approximate acquisition details and price, as well as ownership or lease details should be included.  The square footage and number of rooms, and a description of different office areas should be outlined, including, where applicable: medical equipment, including all diagnostic imaging and major medical equipment; pharmacy, laboratory, examination rooms, waiting rooms, and other areas.

  • Management Information Systems

Document types of hardware and software and the cost, age, and suitability of all components, including their management functions, reporting capabilities, and integration between programs.

  • History of the Practice Entity

Give the date founded and by whom, the number of full-time equivalent (FTE) physicians in practice by year, the physicians who have joined and left the entity, the dates they practiced at the entity, and their relationship and practice arrangement with the entity.

  • Office Staff Description

Include the number and types of non-physician positions as well as the tenure and salary of all current employees.

  • Competitive Analysis

Include details of hospital programs impacting practice, growth or decline in the volume of business and the reasons, association with other physicians, competitive strengths and threats, the number and volume of procedures performed, any change in the number and volume, and the corresponding fees.

  • Patient Base Information

Encompass income distribution and percentages from different payors, the number of new patients and total patients seen per week, the age mix of patients, the number of hours spent in patient care per week, and the number of surgeries performed.

  • Managed Care Environment

Detail the terms and conditions of all managed care contracts including discounts and withholds, the impact on referral patterns and revenues, willingness to participate in risk sharing contracts and capitation, and the entity’s managed care reporting capabilities.

  • Hospital Privileges and Facilities

List all hospital privileges held by physician members of the medical practice and the requirements for acquiring privileges at the different local hospitals.

  • Credit Policy and Collections

Include practice policies for billing and payment, use of collection agencies, acceptance of assignments, other sources of revenues, and an aged breakdown of accounts receivable.

  • Financial Management

Include cash management procedures and protections, credit lines and interest, controls to improve payment of accounts payable, late payment frequency, formal or informal financial planning methods, and budgeting processes.

  • Operational Assessment Include governance structure for the entity, detailing responsibilities and procedures for performance, conflicts, recruitment, outcomes measures, case management, reimbursement, income, continuing medical education (CME), credentialing, and utilization review.


Allow for discussion of overall relationships with physicians in the community, practice concerns, and needs.

Source: “Research and Financial Benchmarking in the Healthcare Industry”

By Robert James Cimasi; MHA, ASA, CBA. AVA, CM&AA, CMP™
By Todd A. Zigrang; MHA, MBA, CHE
By Anne P. Sharamitaro; Esq


And so, your thoughts and comments on this ME-P are appreciated. What did we forget and what is your experience? Why did you need a medical practice valuation?

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.


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:


FINANCE: Financial Planning for Physicians and Advisorsation?

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2 Responses

  1. Dr. Marcinko,

    Fees for all appraisals and consultations are based on an hourly rate.

    It is unethical and against USPAP rules to charge a “contingency ” fee based on the appraised value, a finders fee, or a fee based on whether or not the appraiser will purchase the item or medical practice.



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