Understanding the Premise of Appraisal Value and Investment Time Horizon

Posted on July 8, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

Join Our Mailing List

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. 

Channel Surfing the ME-P

Have you visited our other topic channels? Established to facilitate idea exchange and link our community together, the value of these topics is dependent upon your input. Please take a minute to visit. And, to prevent that annoying spam, we ask that you register. It is fast, free and secure.

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:

Product DetailsProduct DetailsProduct Details

Filed under: CMP Program, Health Economics, Practice Worth | Tagged: , , , , , , , , | 4 Comments »