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    Dr. Marcinko is originally from Loyola University MD, Temple University in Philadelphia and the Milton S. Hershey Medical Center in PA; as well as Oglethorpe University and Emory University in Georgia, the Atlanta Hospital & Medical Center; Kellogg-Keller Graduate School of Business and Management in Chicago, and the Aachen City University Hospital, Koln-Germany. He became one of the most innovative global thought leaders in medical business entrepreneurship today by leveraging and adding value with strategies to grow revenues and EBITDA while reducing non-essential expenditures and improving dated operational in-efficiencies.

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    Dr. David E. Marcinko is past Editor-in-Chief of the prestigious “Journal of Health Care Finance”, and a former Certified Financial Planner® who was named “Health Economist of the Year” in 2010. He is a Federal and State court approved expert witness featured in hundreds of peer reviewed medical, business, economics trade journals and publications [AMA, ADA, APMA, AAOS, Physicians Practice, Investment Advisor, Physician’s Money Digest and MD News] etc.

    Later, Dr. Marcinko was a vital recruited BOD member of several innovative companies like Physicians Nexus, First Global Financial Advisors and the Physician Services Group Inc; as well as mentor and coach for Deloitte-Touche and other start-up firms in Silicon Valley, CA.

    As a state licensed life, P&C and health insurance agent; and dual SEC registered investment advisor and representative, Marcinko was Founding Dean of the fiduciary and niche focused CERTIFIED MEDICAL PLANNER® chartered professional designation education program; as well as Chief Editor of the three print format HEALTH DICTIONARY SERIES® and online Wiki Project.

    Dr. David E. Marcinko’s professional memberships included: ASHE, AHIMA, ACHE, ACME, ACPE, MGMA, FMMA, FPA and HIMSS. He was a MSFT Beta tester, Google Scholar, “H” Index favorite and one of LinkedIn’s “Top Cited Voices”.

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Understanding the Art of Selling Your Medical Practice

Part Two of Medical Practice Valuation

By Dr. David Edward Marcinko, MBA, CMP

By Prof. Hope Rachel Hetico, RN, MHA, CMP

www.CertifiedMedicalPlanner.org

In Part 1, we discussed how to establish fair market value (FMV) for a medical practice in the article, “Establish Your Practice’s Fair Market Value.” This time, we’ll review important terms and conditions for the sale transaction.

Valuation Types

Unfortunately, as a general rule, medical practice worth is presently deteriorating. A good medical practice is no longer a good business necessarily, and selling doctors can no longer automatically expect to extract a premium sale price. Nevertheless, appraising your medical practice on a periodic basis can play a key role in obtaining maximum value for it.

Competent practice valuation specialists typically charge a retainer to cover out-of-pocket expenses. Fees should not be based on a percentage of practice value, and may take 30-45 days to complete. Flat fees should be the norm because a sliding scale or percentage fee may be biased toward over-valuation in a declining marketplace. Fees range from $7,500-$50,000 for the small to large medical practice or clinic.

Expect to pay a retainer and sign a formal, professional engagement letter. Seek an unbiased and independent viewpoint. Buyer and sellers should each have their own independent appraisal done, using similar statistics, accounting measures, and economic assumptions.

At the Institute of Medical Business Advisors, Inc www.MedicalBusinessAdvisors.com we use three engagement levels that vary in intensity, purpose, and cost:

1. A comprehensive valuation provides an unambiguous value range. It is supported by most all procedures that valuators deem relevant, with mandatory onsite review. This gold standard is suitable for contentious situations. A written “opinion of value” is applicable for litigation support activities like depositions and trial. It is also useful for external reporting to bankers, investors, the public, Internal Revenue Service (IRS), etc.

2. A limited valuation lacks additional suggested Uniform Standards of Professional Appraisal Practice (USPAP) procedures. It is considered to be an “agreed upon engagement,” when the client is the only user. For example, it may be used when updating a buy/sell agreement, or when putting together a practice buy-in for a valued associate. This limited valuation would not be for external purposes, so no onsite visit is necessary and a formal opinion of value is not rendered.

3. An ad-hoc valuation is a low level engagement that provides a gross non-specific approximation of value based on limited parameters or concerns involved parties. Neither a written report nor an opinion of value is rendered. It is often used periodically as an internal organic growth/decline gauge.

Structure Sales Transactions

When the practice price has been determined and agreed on, the actual sales deal can be structured in a couple of ways:

(1) Stock Purchase v. Asset Purchase

In an asset transaction, the buyer will receive a tax amortization benefit associated with the intangible value of the business. This tax amortization represents a non-cash expense benefiting the buyer. In this case, the present value of those future tax benefits is added to the business enterprise value.

(2) Corporate Transactions

Typical private deals in the past involved some multiple (ratio) of earning before income taxes (EBIT)—usually a combination of cash, restricted stock, notes receivable, and possibly assumption of liabilities. For some physician hospital organizations, and public deals, the receipt of common stock can increase the practice price by as much as 40-50 percent (to accept the corresponding business risk, in lieu of cash).

Complete the Deal

The deal structure will vary depending on whether the likely buyer is a private practitioner, health system or a corporate partner. Some key issues to consider in the “art of the deal” include:

  • Working capital (in or out?): Including working capital in the transaction will increase the sale price.
  • Stock vs. asset transaction: Structuring the deal as an asset purchase will increase practice value due to the tax amortization benefits received by the buyer for intangible assets of the practice.
  • Common stock premium: The total sale price can be significantly higher than a cash equivalent price for accepting the risk and relative illiquidity of common stock as part of the payment.
  • Physician compensation: If your goal is to maximize practice value, take home a lower salary to increase practice sale price. The reverse is also true.

Understand Private Deal Structure

Assuming a practice sale is a private transaction, deal negotiations are based on the following pricing methodologies:

Seller financing: Many transactions involve an earn-out arrangement where the buyer puts money down and pays the balance under a formula based on future revenues, or gives the seller a promissory note under similar terms. Seller financing decreases a buyer’s risks (the longer the terms, the lower the risk). Longer terms demand premiums, while shorter terms demand discounts. Premiums that buyers pay for a typical seller-financed practice are usually more than what you would expect from a simple time value of money calculation, as a result of buyer risk reduction from paying over time, rather than up front with a bank loan or all cash. Remember to obtain a life insurance policy on the buyer.

Down payment: The greater the down payment for acquisition of a medical practice, the greater the risk is to the buyer. Consequently, sellers who will take less money up front can command a higher than average price for their practice, while sellers who want more down usually receive less in the end.

Taxation: Tax consequences can have a major impact on the price of a medical practice. For instance, a seller who obtains the majority of the sales price as capital gains can often afford to sell for a much lower price and still pocket as much or more than if the sales price were paid as ordinary income. Value attributed to the seller’s patient list, medical records, name brand, good will, and files qualifies for capital gains treatment. Value paid for the selling doctor’s continuing assistance after the sale and value attributed to a non-compete agreement are taxed at ordinary income. A buyer willing to allocate more for items with capital gains treatment, or a seller willing to take more in ordinary income, can frequently negotiate a better price. This is the essence of economically prudent practice transition planning.

Sidestep Common Buyer Blunders

Here are 10 blunders to avoid, as a buyer:

1. Believing the selling doctor’s attestations. Always verify data through an independent appraisal.

2. Wanting to change the culture of the practice. Be careful: Patients may not adjust quickly to change.

3. Using all available cash without keeping a reserve for potential contingencies.

4. Creating a conflict with the seller by recognizing a weakness and continually focusing on it for a bargain price.

5. Failing to realize that managed care plan contracts can be lost quickly or may not be always transferable.

6. Suffering from analysis paralysis. Money cannot be made by continually checking out a medical practice, only by actually running one.

7. Not appreciating the uniqueness of each practice, and using inaccurate “rules of thumb” from the golden age of medicine.

8. Not realizing that practice worth and goodwill value have plummeted lately and continue to decline in most parts of the country.

9. Not understanding that practice brokers may play both sides of the buy/sell equation for profit. Brokers usually are not obligated to disclose conflicts of interest, are not fiduciaries, and do not provide testimony as a court-approved expert witness.

10. Not hiring an appraisal professional who will testify in court, if need be, using the IRS-approved USPAP methods of valuation. Always assume that the appraisal will be contested (many times, it is).

After pricing and contracting due diligence has been performed, the next step in the medical practice sale process—as Donald Trump might say—is just good, old-fashioned negotiation.

Electronic Downloads

Part I: Part I

Part II: Part II

Additional Reading:

Cimasi, R.J., A.P. Sharamitaro, T.A. Zigrang, L.A.Haynes. Valuation of Hospitals in a Changing Reimbursement and Regulatory Environment. Edited by David E. Marcinko. Healthcare Organizations: Financial Management Strategies. Specialty Technical Publishers, 2008.

Marcinko, D.E. “Getting it Right: How much is a plastic surgery practice really worth?” Plastic Surgery Practice, August 2006.

Marcinko, D.E., H.R. Hetico. The Business of Medical Practice (3rd ed). Springer Publishing,New York,N.Y., 2011.

Marcinko, D.E. and H.R. Hetico. Risk Management and Insurance Planning for Physicians and Advisors. Jones and Bartlett Publishers, Sudbury, Mass., 2007.

Marcinko, D.E. and H.R. Hetico. Financial Planning for Physicians and Advisors. Jones and Bartlett Publishers, Sudbury, Mass., 2007.

Marcinko, D.E. and H.R. Hetico. Dictionary of Health Insurance and Managed Care. Springer Publishers, New York, N.Y., 2007.

Marcinko, D.E. and H.R. Hetico. Dictionary of Health Economics and Finance. Springer Publishers,New York,N.Y., 2007.

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Transitioning and Appraising a Podiatry [Medical] Practice

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A Round Table Fair Market Valuation Discussion of One

By Dr. David Edward Marcinko MBA CMP™

[Former – American Society of Health Economists (ASHE) member]

[Editor-in-Chief]

www.CertifiedMedicalPlanner.org

Recently, I was asked to participate in a roundtable of expert’s discussion on the worth or fair market value [FMV] of a typical podiatric [medical] practice on an “ongoing concern” basis.

Of course, this is the type of engagement we often perform at the www.MedicalBusinessAdvisors.com And, I have written about this topic informally on this blog, and more formally in our white-papers and books: www.BusinessofMedicalPractice.com

So, I was pleased to add my experienced opinion to the discussion sponsored by a trade industry magazine upon the invitation of Editor Dr. Barry H. Block JD.

LINK: Podiatry Mgmt Round Table

Assessment

Due to copyright issues, I posted only my comments to the questions posed to all participants. Nevertheless, they are very representative of most medical practices with the exception of the noted podiatric-specific differences.

Invitation: Letterhead.iMBA_Inc.

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Thinking About Selling or Transitioning Your Medical Practice?

We Can Help with a FMV Practice Appraisal

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A Profitable Transition

You can also choose how to “wind-down” or transition out of practice gracefully and economically, as you work with only select patients, on-board a new associate/partner, or sell your practice outright.

 

Your Practice Business Equity

Either way, we can help you unlock the hard-earned equity in your medical practice and ensure that your patients – and life’s work – are taken care of with a fair market valuation. Purchasing and reviewing our books and white-papers is a great way to start. Otherwise – call us today?

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The Ins and Outs of Selling Your Business

Cost-Benefit Analysis and FMV for Entrepreneurs

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There comes a time in (almost) every entrepreneur’s life when the question of whether to sell his/her business inevitably arises.

So, if you need a proper cost-benefit analysis, take a look at the info-graphic below.

Assessment

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Conclusion

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On Selling or Transitioning Out of Medical Practice?

We Can Help with a FMV Practice Appraisal – Get a FREE White-Paper

By Ann Miller RN MHA

[Executive-Director]

The www.MedicalBusinessAdvisors.com practice valuation and transition team can help you appraise your medical practice, develop a new associate/partner transition plan, and even help transition your patients.

A Profitable Transition

You can also choose how to “wind-down” or transition out of practice gracefully and economically, as you work with only select patients, on-board a new associate/partner, or sell your practice outright.

Your Practice Business Equity

Either way, we can help you unlock the hard-earned equity in your medical practice and ensure that your patients, and life’s work – are taken care of professionally.

Purchasing and reviewing our books and white-papers is a great way to start. Otherwise – call, or email us, today?

Let’s Talk or e-mail:

770.448.0769

MarcinkoAdvisors@msn.com for a free white paper!

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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Understanding the Premise of Appraisal Value and Investment Time Horizon

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Key Issues in Healthcare Entity Valuation and Appraisal

By Robert James Cimasi; MHA, ASA, AVA, CBA, CMP™

cimasiwww.HealthCapital.com

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.

hospital

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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Conclusion

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Proposed Disallowance of Fair Market Value for FLPs

On the HR 436 Proposal for FLPs

By Linda Trugman; CPAtrugman, MBA, ABV, ASA, MCBA

On January 9, 2009 the US House of Representatives introduced HR 436. The Bill would establish the federal estate tax exemption at $3,500,000, and set the tax rate for estates exceeding that amount at 45 percent, eliminating the currently scheduled 2010 phase-out and subsequent reversion to pre-Bush tax cut levels with the $1 million exclusion and a 55 percent tax rate.

Estate Planning Technique Elimination

Importantly, the Bill, if enacted as proposed, would remove a popular estate planning technique by eliminating most discounts associated with what is referred to generically as family limited partnerships [FLPs, a general term applied to closely held asset holding companies often holding non-business assets].

FLP Non-Controlling Interests

Currently, when a physician-investor or any other individual transfers a non-controlling interest in a FLP, whether by gift or at death, the interest is valued at the price that a willing buyer would pay for the partnership interest, or fair market value. Since such FLP interests are not publicly traded, and do not represent a controlling interest in the partnership, business appraisers often assign substantial discounts in valuing these interests.

Case Model:

For example, a 10 percent limited partnership interest in a partnership that holds $1 million worth of securities would not be valued at $100,000 under current law. Rather, because a buyer of the partnership interest cannot sell the interest on the open market, nor exert control prerogatives on the partnership, he or she would pay materially less for the interest [perhaps 30 percent to 50 percent less]. 

Elimination of FMV Standards

The Bill as drafted would be effective for transfers occurring after the date of enactment. However, there is always the possibility that any final statute might be applied retroactively. While the fate of this piece of legislation is uncertain, it may reflect the attitude of the new administration towards keeping and strengthening the estate tax. 

If HR 436 becomes law, appraisers would no longer be allowed to apply Fair Market Value standards to valuing these non-control FLP interests; they would not be able to apply any discounts to “non-business” assets held by partnerships or other entities. Instead, those assets would be valued as though they were transferred directly to the recipient. 

Assessment

The Bill as drafted would be effective for transfers occurring after the date of enactment. However, there is always the possibility that any final statute might be applied retroactively. While the fate of this piece of legislation is uncertain, it may reflect the attitude of the new administration towards keeping and strengthening the estate tax. I have attached the proposed legislation to this post.

File:  hr-436 

Conclusion

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