by Keith Borglum, CHBC, CBB, IRS-Qualified Appraiser
A practice appraisal (or valuation) may be defined as an estimation of the value of a business by a qualified, impartial, and disinterested person. It is a product of both professional judgment and professional opinion on value.
Value should not be confused with price. Value is determined, price is negotiated.
Price refers to the amount for which a practice actually sells. Successful negotiation between two individuals, each with their own perceived value, regarding the transfer of a practice, results in a price.
In a practice transaction, price is negotiated under specific circumstances by a given buyer and a given seller, each with a personal motivation.
Value is a creation of opinion. Value is an economic term that sets it apart from price. Fair Market Value is what the practice is worth to "a hypothetical buyer, in possession of all the facts, and under no adverse influence to act". Strategic Value is what the business is worth to a particular buyer, and can only be determined by that buyer, usually because they are bringing added value or synergies to the acquistion. Strategic Value can be a very risky strategy in healthcare practices because of Federal law, for example the prohibition on paying for referrals, or Stark, or HOPD advantages, RAC, and now the unsettled issues under MACRA.
To estimate value, an appraiser makes assumptions regarding the factors that would apply to most buyers. Encapsulated in Standards of value and Premises of value, (both terms of which have much published and many court cases about them ) these assumptions significantly affect an appraiser's findings. For example, if you think Medicare will increase reimbursement in the future, that would be an uncommon assumption that could greatly affect an opinion of future cash flow and value.
There are a number of Standards (types) of value. The Standard of value applied to a particular appraisal will be determined either by the requirements of law -such as in a divorce, litigation, or estate proceeding- or by the preferences of the client or court with the agreement of the appraiser. Appraisers typically appraise using the Standard of Fair Market Value of healthcare practices to comply with Medicare, State and Federal guidelines.
There are also different Premises of value. A Premise of value differs from a Standard of value in that it identifies an assumption upon which the appraisal reasoning proceeds; such as a Fair Market Value under the Premise of a Going Concern; or under the Premise of Forced Liquidation. The optimal Premise for viewing a particular set of assets depends on the purpose of an appraisal. If, for example, a prospective buyer wished to know the value of a target doctor's practice for purposes of buying and continuing the practice, he or she would be best served by an appraisal on the Premise of Going Concern. A lender who wanted to test the adequacy of the same practice as collateral for a loan might be safer with an appraisal on a Premise of Liquidation.
In most cases both the buyer and seller of a medical practice are interested in the Fair Market Value under the Premise of a Going Concern, which means the value of the practice if continued in a normal and customary way.
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