• Member Statistics

    • 762,808 Colleagues-to-Date [Sponsored by a generous R&D grant from iMBA, Inc.]
  • David E. Marcinko [Editor-in-Chief]

    As a former Dean and appointed Distinguished University Professor and Endowed Department Chair, Dr. David Edward Marcinko MBA was a NYSE broker and investment banker for a decade who was respected for his unique perspectives, balanced contrarian thinking and measured judgment to influence key decision makers in strategic education, health economics, finance, investing and public policy management.

    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.

    Professor David Marcinko was a board certified surgical fellow, hospital medical staff President, public and population health advocate, and Chief Executive & Education Officer with more than 425 published papers; 5,150 op-ed pieces and over 135+ domestic / international presentations to his credit; including the top ten [10] biggest drug, DME and pharmaceutical companies and financial services firms in the nation. He is also a best-selling Amazon author with 30 published academic text books in four languages [National Institute of Health, Library of Congress and Library of Medicine].

    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”.

    Marcinko is “ex-officio” and R&D Scholar-on-Sabbatical for iMBA, Inc. who was recently appointed to the MedBlob® [military encrypted medical data warehouse and health information exchange] Advisory Board.

    entrepreneur

    Frontal_lobe_animation

  • ME-P Information & Content Channels

  • ME-P Archives Silo [2006 – 2019]

  • Ann Miller RN MHA [Managing Editor]

    ME-P SYNDICATIONS:
    WSJ.com,
    CNN.com,
    Forbes.com,
    WashingtonPost.com,
    BusinessWeek.com,
    USNews.com, Reuters.com,
    TimeWarnerCable.com,
    e-How.com,
    News Alloy.com,
    and Congress.org

    Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

    Product Details

    Product Details

    Product Details

  • CERTIFIED MEDICAL PLANNER® program

    New "Self-Directed" Study Option SinceJanuary 1st, 2018
  • Most Recent ME-Ps

  • PodiatryPrep.org


    BOARD CERTIFICATION EXAM STUDY GUIDES
    Lower Extremity Trauma
    [Click on Image to Enlarge]

  • ME-P Free Advertising Consultation

    The “Medical Executive-Post” is about connecting doctors, health care executives and modern consulting advisors. It’s about free-enterprise, business, practice, policy, personal financial planning and wealth building capitalism. We have an attitude that’s independent, outspoken, intelligent and so Next-Gen; often edgy, usually controversial. And, our consultants “got fly”, just like U. Read it! Write it! Post it! “Medical Executive-Post”. Call or email us for your FREE advertising and sales consultation TODAY [770.448.0769]

    Product Details

    Product Details

  • Medical & Surgical e-Consent Forms

    ePodiatryConsentForms.com
  • iMBA R&D Services

    Commission a Subject Matter Expert Report [$250-$999]January 1st, 2019
    Medical Clinic Valuations * Endowment Fund Management * Health Capital Formation * Investment Policy Statement Analysis * Provider Contracting & Negotiations * Marketplace Competition * Revenue Cycle Enhancements; and more! HEALTHCARE FINANCIAL INDUSTRIAL COMPLEX
  • iMBA Inc., OFFICES

    Suite #5901 Wilbanks Drive, Norcross, Georgia, 30092 USA [1.770.448.0769]. Our location is real and we are now virtually enabled to assist new long distance clients and out-of-town colleagues.

  • ME-P Publishing

  • SEEKING INDUSTRY INFO PARTNERS?

    If you want the opportunity to work with leading health care industry insiders, innovators and watchers, the “ME-P” may be right for you? We are unbiased and operate at the nexus of theoretical and applied R&D. Collaborate with us and you’ll put your brand in front of a smart & tightly focused demographic; one at the forefront of our emerging healthcare free marketplace of informed and professional “movers and shakers.” Our Ad Rate Card is available upon request [770-448-0769].

  • Reader Comments, Quips, Opinions, News & Updates

  • Start-Up Advice for Businesses, DRs and Entrepreneurs

    ImageProxy “Providing Management, Financial and Business Solutions for Modernity”
  • Up-Trending ME-Ps

  • Capitalism and Free Enterprise Advocacy

    Whether you’re a mature CXO, physician or start-up entrepreneur in need of management, financial, HR or business planning information on free markets and competition, the "Medical Executive-Post” is the online place to meet for Capitalism 2.0 collaboration. Support our online development, and advance our onground research initiatives in free market economics, as we seek to showcase the brightest Next-Gen minds. ******************************************************************** THE ME-P DISCLAIMER: Posts, comments and opinions do not necessarily represent iMBA, Inc., but become our property after submission. Copyright © 2006 to-date. iMBA, Inc allows colleges, universities, medical and financial professionals and related clinics, hospitals and non-profit healthcare organizations to distribute our proprietary essays, photos, videos, audios and other documents; etc. However, please review copyright and usage information for each individual asset before submission to us, and/or placement on your publication or web site. Attestation references, citations and/or back-links are required. All other assets are property of the individual copyright holder.
  • OIG Fraud Warnings

    Beware of health insurance marketplace scams OIG's Most Wanted Fugitives at oig.hhs.gov

FREE WHITE PAPER [Is Medical Practice a New Asset Class?] from iMBA, Inc.

Join Our Mailing List

Is Medical Practice a New Asset Class Under MPT?

Get your FREE White Paper

SPONSOR:

http://www.CertifiedMedicalPlanner.org

Valuing the Private Practice Physician’s Quintessential Alternative Financial Investment

Dr. DEM

By Dr. David Edward Marcinko MBA CMP™ MBBS

Order NOW!

To help you decide if medical practice is indeed an asset class – and how much a practice may be worth – and how to valuate a practice – request your free white paper using the order form below.

 Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

FREE WHITE PAPER [Is Medical Practice a New Asset Class?]

Courtesy: http://www.CertifiedMedicalPlanner.org

Request your FREE White Paper Here!

But …. enough about me!

Join Our Mailing List

Did you read my interviews?

Dr. David Edward Marcinko MBA

www.MedicalBusinessAdvisors.com

[CEO and Editor-in-Chief]

DEM 2013

AMA News:

Goodwill hunting – what’s your medical practice worth?

AMA News.Valuation.Marcinko

Best practices can help hospitals in recession

Arkansas Medical News:

Arkansas Medical News Interviews Dr. Marcinko

Conclusion

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.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

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

Our Other Print Books and Related Information Sources:

Health Dictionary Series: http://www.springerpub.com/Search/marcinko

Practice Management: http://www.springerpub.com/product/9780826105752

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

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

Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

Product DetailsProduct Details

Financial Planning for Physicians

A Handbook for Doctors and their Financial Advisors

ADVERTISEMENT

Financial Planning Handbook for Physicians and Advisors

Book Review and Summary

Financial Planning for Physicians and Advisors describes a personal financial planning program to help doctors avoid the perils of harsh economic sacrifice.

It outlines how to select a knowledgeable financial advisor and develop a comprehensive personal financial plan, and includes important sections on: insurance and risk management, asset diversification and modern portfolio construction, income tax and retirement planning, and medical practice succession and estate planning, etc.

When fully implemented with a professional’s assistance, this book will help physicians and their financial advisors develop an effective long-term financial plan.

Order now: http://www.jblearning.com/catalog/0763745790/

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

###

About iMBA Inc Expertise in Healthcare Valuation

iMBA Inc., and the ME-P Team

By Ann Miller RN MHA

MarcinkoAdvisors@msn.com

Ph: 770-448-0769

Join Our Mailing List

The www.MedicalBusinessAdvisors.com is focused solely on appraising medical practices, surgery centers [ASCs], podiatry, optometry and allied healthcare businesses.

Working with our affiliated partners, like the ME-P and others, we are also available for behemoth multi-specialty medical practices, major clinics, hospitals, related healthcare organizations and networks, and PHOs, etc.

We are backed by the expertise of dedicated appraisers and valuation analysts who are trained by the foremost organizations in our industry www.CertifiedMedicalPlanner.org

Practice owners, attorneys and accountants retain us for projects including, but not limited to the following:.

There are a Myriad of Reasons for Obtaining a Medical Practice Valuation and Appraisal Engagement

  • Outright selling-buying
  • Partnership and Associate buy-in / buy-out
  • Mergers and Acquisitions
  • Organic growth tracking
  • Hospital integrations
  • Private and public reporting
  • Financing and Venture Capital
  • Estate and tax planning

Our Capability

We have the ability to provide extensive analysis of value components in healthcare practices and provide appraisals based on business, economic, and market conditions. This involves detailed examination of financials and clinical data in the context of numerous factors including medical specialty, physician supply and demand, payer mix, regulatory environment, regional dynamics, and risk premium.

Assessment

Our methods and approaches adhere to accepted standards of healthcare practice appraisal and utilize direct market data to reach justifiable conclusions.  These are documented in a comprehensive report which is tailored to meet the need of the specific engagement.

Conclusion

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.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

DICTIONARIES: http://www.springerpub.com/Search/marcinko
PHYSICIANS: www.MedicalBusinessAdvisors.com
PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
BLOG: www.MedicalExecutivePost.com
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

k you for your consideration

Product Details  Product Details

   Product Details

Thinking About Selling or Transitioning Your Medical Practice?

We Can Help with a FMV Practice Appraisal

ADVERTISEMENT

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 with a fair market valuation. Purchasing and reviewing our books and white-papers is a great way to start. Otherwise – call us today?

Let’s Talk

770.448.0769

MarcinkoAdvisors@msn.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

Our Other Print Books and Related Information Sources:

Health Dictionary Series: http://www.springerpub.com/Search/marcinko

Practice Management: http://www.springerpub.com/product/9780826105752

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

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

Healthcare Organizations: www.HealthcareFinancials.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Product Details 

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.

Product DetailsProduct DetailsProduct Details

Product Details  Product Details

   Product Details 

Establishing Your Medical Practice’s Fair Market Value

Join Our Mailing List

Part One of Medical Practice Valuation

By Dr. David Edward Marcinko, MBA, CMP

By Professor Hope Rachel Hetico, RN, MHA, CMP

www.CertifiedMedicalPlanner.org

In recent years, the physician practice market has experienced a noticeable increase in practice merging and acquisitions. Medical practices are being acquired by health systems in anticipation of Accountable Care Organization (ACO) delivery models.

For physicians, the decision to buy, sell, or merge a medical practice is more complicated than ever, and determining a medical practice’s worth is crucial to this process. Over the next two months, we’ll review the why, when, and how of the contemporary medical practice valuation.

Value Isn’t an Absolute Number

A medical practice’s tangible and intangible assets can be grouped into two broad categories:

  • Physical assets: Examples are real estate, medical records, leaseholds, medical equipment and furnishings, and accounts receivable (A/R).
  • Non-physical assets: These include goodwill, restrictive covenants, buy/sell agreements, managed care contracts, and an assembled workforce.

Estimates of value differ markedly, depending on the purpose of the appraisal, the acumen of the appraiser, etc. To help determine the value, some important questions to consider are:

  • What is the value of the practice for purchase or sale?
  • What is the value of a practice for merger?
  • What is the value of practice assets for joint venture with a corporate partner?
  • What is the value to establish buy-in or buy-out arrangements for partners?
  • What is the value of practice assets for purchase or sale, apart from ongoing operations?

To answer these questions, physicians (buyers and sellers) must understand how practices are valuated—beginning with the following informal, and then more formal, definitions:

Informal Terms of Valuation

  • The “asking price” is often arbitrary and difficult to substantiate, and typically is reduced 25-50 percent after negotiations.
  • The “creative price” is derived by way of creative financing. For example, the practice may provide the down payment.
  • The “emotional price” may involve either a motivated buyer or seller, who pays an under- or overinflated price for the practice.
  • The “friendly price” is reserved for associates, partners, or other colleagues.
  • The “realistic price” is one that both buyer and seller believe is fair.

Formal Terms of Valuation

  • Most appraisers use “fair market value” (FMV) as the standard to derive a reasonable value for a practice. FMV means an arm’s length transaction between an unpressured, informed buyer and an unpressured, informed seller.
  • The “business enterprise value” of a practice equals a combination of all assets (tangible and intangible), and the working capital, of a continuing business.
  • The value of “owner’s equity” equals the combined values of all practice assets (tangible and intangible), less all practice liabilities (booked and contingent).
  • The “working capital value” equals the excess of current assets (cash, A/R, supplies, inventory, prepaid expenses, etc.) over current liabilities (accounts payable, accrued liabilities, etc.).

Realizing that there is no absolute sales price is the essence of FMV. When determining valuation, look for a price range with a reasonable floor and ceiling.

Understand The Lingo

If you are a practice buyer or seller, make sure you understand terms and appraisal definitions.

That’s a lesson George Farmer, a primary care physician inFlorida, learned the hard way. He asked his accountant to appraise his business. When he was ready to sell, his attorney (who also happens to be his brother-in-law) drew up the sales contract. Farmer was pleased that the practice sold quickly for its full asking price.

What he didn’t know (but would discover) is that accounting or “book” value—the figure his accountant gave him—is far different than the FMV that he could have received.

Was the CPA wrong? Not really. Was the doctor incorrect? No. But each was operating under a different set of terms and definitions, without knowledge of each other’s perspectives.

How to Begin Valuation

The following steps should occur before the practice appraisal process begins:

  • Retain an appraiser (for each side) who understands the changing health care industry.
  • Aggregate historic practice business information and consolidated financial statements, operating statistics, payer mix, CPT® utilization, acuity rates, etc.
  • Eliminate one-time, non-recurring expenses, adjusted or normalized for excessive or below normal expenses.
  • Understand key assumptions used in financial projections.

To determine value, appraisers should follow the American Society of Appraisers’ Principles of Appraisal Practice and Code of Ethics. The IRS issued guidelines in 1995 further suggesting that appraisers use the general methods of the Uniform Standards of Professional Appraisal Practices (USPAP), which recognize three approaches to medical practice valuation.

1. Income Methods

There are two methods to value a practice by income:

(a) Capitalization Method: The excess earnings or capitalization method estimates value by dividing normalized historical or current income by an appropriate rate of return for the buyer. This method does not require assumptions.

(b) Discounted Method: Discounted Cash Flow (DCF): Analysis requires assumptions to estimate practice value by discounting future net cash flows to their present worth based on market rates of return required by an investor. Understanding the key assumptions produces a meaningful estimate of practice value. These assumptions may include:

  • projections of future practice revenue, productivity, reimbursement trends, and shifts in payer mix
  • projections of practice cost structures and projected physician compensation
  • after-tax practice cash flows
  • reinvestments to replace equipment or other assets
  • residual practice value at the end of the forecast period
  • discount rate based on the practice specific weighted average cost of capital
  • practice efficiencies, operations, and competitive market conditions

The DCF analysis consistently produces higher values than other methods of estimating practice value because there may be supportable reasons to forecast improvements in future practice performance.

2. Marketplace Multiples

Market transaction multiples are ratios developed by correlating actual practice sale prices to key practice performance measurements. Common multiples include comparisons of sale price to revenue, sale price to earnings before interest and taxes (EBIT), sale price to earnings before interest, taxes, and depreciation allowance (EBITDA), gross revenue, net revenue, and the sale price to number of physicians.

Market transaction multiples are typically limited to serving as a benchmark for testing the reasonableness of the other approaches. They are becoming less common and less useful.

3. Cost Approach

The cost approach calls for identification and separate valuation of all the practice assets, including goodwill, depreciated over 15 years.

The cost approach is more labor intensive than using the enterprise analysis to estimate practice value; especially for a new practice, which typically includes the expenses to acquire space, office furnishings, equipment, marketing, advertising, staff development, and losses incurred during the startup period. This estimate of “replacement cost or cost avoidance” value represents an upper limit (or ceiling) of value, and generally is not considered useful in estimating the value of an established medical practice.

Net Income Statement Adjustments

When analyzing a set of financial statements to determine practice value, adjustments (normalizations) generally are needed to produce a clearer picture of likely future income and distributable cash flow. It also allows more of an “apples to apples” line item comparison. This normalization process usually consists of making three main adjustments to a medical practice’s net income (profit and loss) statement.

1. Non-Recurring Items: Estimates of future distributable cash flow should exclude non-recurring items. Proceeds from the settlement of litigation, one-time gains/losses from the selling of assets or equipment, and large write-offs that are not expected to reoccur, each represent potential nonrecurring items. The impact of nonrecurring events should be removed from the practice’s financial statements to produce a clearer picture of likely future income and cash flow.

2. Perquisites: The buyer of a medical practice may plan to spend more or less than the current doctor-owner for physician executive compensation, travel and entertainment expenses, and other perquisites of current management. When determining future distributable cash flow, income adjustments to the current level of expenditures should be made for these items.

3. Non-cash Expenses: Depreciation expense, amortization expense, and bad debt expense are all non-cash items which impact reported profitability. When determining distributable cash flow, you must analyze the link between non-cash expenses and expected cash expenditures.

The annual depreciation expense is a proxy for likely capital expenditures over time. When capital expenditures and depreciation are not similar over time, an adjustment to expected cash flow is necessary.

Some practices reduce income through the use of bad debt expense rather than direct write-offs. Bad debt expense is a non-cash expense that represents an estimate of the dollar volume of write-offs that are likely to occur during a year. If bad debt expense is understated, practice profitability will be overstated.

Balance Sheet Adjustments

Adjustments also can be made to a practice’s balance sheet to remove non-operating assets and liabilities, and to restate asset and liability value at market rates (rather than cost rates).

Assets and liabilities that are unrelated to the core practice being valued should be added to or subtracted from the value, depending on whether they are acquired by the buyer. Examples include the asset value less outstanding debt of a vacant parcel of land, and marketable securities that are not needed to operate the practice. Other non-operating assets, such as the cash surrender value of officer life insurance, generally are liquidated by the seller and are not part of the business transaction.

Assessment

With a basic understanding of practice valuation and the steps involved, buyers and sellers will be better prepared for next steps. So, next time in Part 2, we will discuss the art of the deal, and how to structure the practice sale.

Conclusion

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: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

AdditionalReading:

Cimasi, Robert James: Valuation of Hospital in a Changing Reimbursement and Regulatory Environment. In,Marcinko,DE(Editor): Healthcare Organizations (Financial Management Strategies). Institute of Medical Business Advisors Inc.,Atlanta,Ga., 2011

Marcinko,DE: “Getting it Right,” How Much is a Plastic Surgery Practice Really worth? Plastic Surgery Products, August 2006.

Marcinko,DEand Hetico, HR: The Business of Medical Practice (third edition). Springer Publishing,New York,N.Y., 2011.

Marcinko,DEand Hetico; HR: Risk Management and Insurance Planning for Physicians and Advisors, Jones andBartlettPublishers,Sudbury,Mass., 2007.

Marcinko,DEand Hetico; HR: Financial Planning for Physicians and Advisors, Jones andBartlettPublishers,Sudbury,Mass., 2007.

Marcinko,DEand Hetico, HR: Dictionary of Health Insurance and Managed Care, Springer Publishing,New York,N.Y., 2007.

Marcinko,DEand Hetico, HR: Dictionary of Health Economics and Finance, Springer Publishing,New York,N.Y., 2007.

Product DetailsProduct DetailsProduct Details

Product Details  Product Details

   Product Details 

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Invite Dr. Marcinko

***

%d bloggers like this: