Florida Doctor

FLDR Spring 2017

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24 f l o r i d a d o c t o r T he signing of the Patient Pro- tection and Affordable Care Act (PPACA) in March 2010 brought about a tremendous amount of uncertainty re- garding reimbursement in the healthcare industry. Many physician practices, which are oen run similarly to other types of small businesses, are not equipped to handle stiff reimbursement pressure. is has created an environment of significant consolidation and acquisition activity for healthcare providers across the country. In valuation, it is first necessary to determine the standard of value that you will adhere to. Healthcare regulations stipulate fair market value as the applica- ble standard of value. Fair market value differs slightly from standard valuation definitions in that the price must be determined as if the transaction occurred between a hypothetical willing and able buyer and a hypothetical willing and able seller. Additionally, both must be well in- formed parties who are not otherwise in a position to generate business for the other party. As such, potential downstream referrals and synergistic benefits between two healthcare organizations cannot be factored into the valuation. Aer determining the standard of value, there are three generally accepted valuation approaches utilized: the Income Approach, Market Approach and Asset (Cost) Approach. In valuation, no single valuation approach is appropriate in all situations, and it is important to consider each approach within the context of the specific interest being appraised. e Income Approach determines a value indication by converting future eco- nomic benefits (cash flows) into a single present amount. When valuing physician practices, it is important to consider the impact of the physician owner's future compensation as this can be an important input when determining future cash flow. Due to the structure of many physician practices, where physician owners take all earnings as compensation, a large portion of these businesses generate little to zero intangible value. However, this is not the case for all physician practices. Physician practices can generate intangible value by leveraging employed physicians and/ or midlevel providers, providing ancil- lary services such as imaging or physical therapy, and performing certain surgical procedures in-office (as opposed to the hospital or ASC). e Market Approach determines a value indication by comparing sales of sim- ilar businesses. As physician practices are highly dependent on the skill and reputa- tion of their providers, it is difficult to find truly similar businesses. Additionally, as many physician practice transactions occur between related or private parties, finding reliable market data is a challenge. Some valuators may use general market multiples to help verify the reasonableness of their valuation, but it should not be the only ap- proach used to value this type of business. e Asset (Cost) Approach, which is widely used, determines a value indica- tion by attributing value to all of Center's assets, both fixed and intangible. e value of a practice's fixed assets, from large medical equipment to tables and chairs, can be determined fairly easily by apprais- ers specialized in this field. Determining the value of a practice's intangible assets, such as the workforce in place and medi- cal records, requires more nuance. e determination of value for the workforce in place is made by estimat- ing the average costs associated with the recruiting, hiring, and training each em- ployee. Advertising and marketing costs are necessary to attract the best talent. Recruiting costs are typically estimated as a percentage of annual salary and typically range between 5% and 15%, depending on the position. e costs to hire staff, which includes sign-on bonuses for physicians and midlevel providers, are also factored in. Additionally, while an employee is being trained for their role, they are oen not adding value to their practice. e What is the Value of Your Practice? Hunter M. Outcalt, CPA and John J. Hakanson Determining the Right Standard of Valuation for Your Business BETTER PRACTICE: Financial Strategies

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