Healthcare valuation: Opportunities & pitfalls to consider
“I see 2009 as being an unbelievably exciting time in health care,” Cindy Collier, chief executive officer and founder of Cindy Collier & Associates Valuation Solutions located in Myrtle Beach, South Carolina, told Law Education Institute, Inc’s (LEI) 26th Annual National CLE Conference®. According to Collier, new technology trends are coming together at the same time as the incoming congressional and presidential administration, which should have “tremendous impact” on healthcare valuations.
One area to watch, for instance, is practice goodwill. Collier told the audience in Vail, Colorado, that she sees tremendous differences between medical practices that adapt new technologies, personnel, etc. to create a platform for transition and others that still focus on the physicians’ attributes and fail to develop the latest medical resources.
(To keep up with the latest professional and regulatory standards, consider BVR’s Guide to Healthcare Valuation, co-edited by Collier and Mark Dietrich, CPA, ABV. Thirty-five articles—from emerging trends in healthcare to choosing (and using) the right valuation methods and benchmarking data for physician practices—make this new, comprehensive resource a must-have for analysts who conduct or are considering healthcare valuations. For the table of contents and introduction, click here or to order click here.)
There will be pitfalls to navigate as well. Benchmarking for physician services continues to create a lot of confusion in the valuation industry, Collier explained. Valuation analysts are applying the data without always understanding “what it is and how to use it,” she said, cautioning BV practitioners to “Remember that when you’re benchmarking compensation, you need to make sure the benchmark and the reported compensation is within the relevant range of compensation that is subject to your report.”
Productivity is the most critical piece of compensation data. “The most common wrong assumption,” according to Collier, is to use median compensation when production (gross revenues, collections, types of procedures performed) for the subject practice may be in the 75th percentile. “It’s so important to know exactly what the practitioners do and how they use their staff,” she said.
Collier says she is also seeing a lot of valuation reports that assume the specific company risk is a certain number—which they use repeatedly. Too many analysts may still be pulling this number “out of the air,” she said. “That’s an area where we still need work.” In her healthcare engagements, Collier uses a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) to assess the practice and its particular risks. Plus, she spends at least half a day on site, talking to personnel, learning who does what, looking at the equipment, ascertaining procedures, physician and patient demographics, etc., in addition to analyzing key records (financial statements, tax returns, depreciation schedules) in line-by-line detail. “If they’re not generating the correct monthly reports, I’ll talk directly with the [systems provider] to make sure the practice is producing what it needs.”
SEC recommends revision of Fair Value standards
What’s new with Fair Value and what does it all mean to you and your practice? BV experts can get assistance sorting it all out at our upcoming 2nd Annual Summit on Fair Value in Financial Reporting taking place on February 2 and 3—the one place you can meet with leaders from FASB, the SEC, the Public Company Accounting Oversight Board (PCABO), the Big Four, the IRS, and professional leaders to hear directly what your responsibilities, risks, and opportunities truly are. If you are doing valuations for financial reporting, you cannot afford to miss this comprehensive program at the Marriott Marquis in New York City. Slated to speak are a number of BV “heavy-hitters,” including Mike Mard, Aswath Damodaran, Neil Beaton, and others. Remember: Last year’s Summit was a sold out event!
In the interim, take a look at the Securities and Exchange Commission’s (SEC) recently released 211-page report to Congress, as mandated by the Emergency Economic Stabilization Act of 2008. In a nutshell, the report from the SEC's Office of the Chief Accountant and Division of Corporation Finance SEC recommended against the suspension of fair value accounting standards. Instead, it suggests improvements to existing practice, including:
1. Development of additional guidance and other tools for determining fair value when relevant market information is not available in illiquid or inactive markets, including consideration of the need for guidance to assist companies and auditors in addressing:
- How to determine when markets become inactive and whether a transaction or group of transactions are forced or distressed;
- How the impact of a change in credit risk on the value of an asset or liability should be estimated;
- When should observable market information be supplemented with and/or reliance placed on unobservable information in the form of management estimates; and
- How to confirm that assumptions utilized are those that would be used by market participants and not just a specific entity.
2. Enhancement of existing disclosure and presentation requirements related to the effect of fair value in the financial statements.
3. Educational efforts, including those to reinforce the need for management judgment in the determination of fair value estimates.
4. Examination by the FASB of the impact of liquidity in the measurement of fair value, including whether additional application and/or disclosure guidance is warranted.
5. Assessment by the Financial Accounting Standards Board (FASB) of whether the incorporation of credit risk in the measurement of liabilities provides useful information to investors, including whether sufficient transparency is provided currently in practice.
6. FASB reassessment of current impairment accounting models for financial instruments, including consideration of narrowing the number of models under U.S. GAAP. (The report finds that under existing accounting requirements, information about impairments is calculated, recognized, and reported on a basis that often differs by asset type.)
7. Improvements, including: Reducing the number of models utilized for determining and reporting impairments, considering whether the utility of information available to investors would be improved by providing additional information about whether current declines in value are consistent with management expectations of the underlying credit quality, and reconsidering current restrictions on the ability to record increases in value (when market prices recover).
Tips and techniques for adjusting owners’ compensation
One of the more important variables in a business appraisal assignment is the selection of what constitutes reasonable compensation for the owner/employee. For many closely held companies, “no single operating expense affects the bottom-line profit as much as the officer’s compensation,” Ron Seigneur, MBA, CPA/ABV, CVA of Lakewood, Colorado’s Seigneur Gustafson LLP explained at the LEI/CLE conference this week.
Seigneur summarized the most recent and relevant court cases, providing an exhaustive list of factors that the tax and other courts consider most meaningful in determining reasonable compensation. He also listed several data sources for valuation analysts to consider—as well as those (such as salary.com or salarywizard.com) that are “scary.” Among other reasons, these employer-reported sites do not include data from individual site users and represent national averages, with geographic adjustments based on the percentage above/below the national average.
Yet, surprisingly, Seigneur still sees data from these sites in some valuation reports. In a recent divorce case, the opposing expert used data from salary.com to substantiate relatively low compensation for the husband, a liquor distributor. Still, when Seigneur used the expert’s job description as the basis for posting a blind classified ad in the local paper—along with Seigneur’s proposed compensation figure—he received over a hundred responses. He whittled these down by education and experience, presenting over thirty-five potential respondents and resumes to the court, which accepted his (Seigneur’s) compensation as the more reasonable.
For more tips, techniques, and war stories: Look for the new article “Reasonable Compensation and the Productivity Adjustment: Tips & Techniques for Owner/Employee Compensation Determinations and Adjustments,” by Seigneur and Kevin Yeanoplos in our newly updated 2009 edition of BVR’s Guide to Personal v. Enterprise Goodwill. Also included in the new Guide is “A Reasonable Compensation Case Study,” by Yeanoplos.
News from the Appraisal Standards Board
The January 16 deadline for written comments on the Appraisal Standards Board’s (ASB) recently-released “Proposed Changes 2010-11 Edition of the Uniform Standards of Professional Appraisal Practice” is fast approaching (for information on the proposed changes see the #75-1 BVWire™.) You can e-mail your comments to firstname.lastname@example.org and submit questions on the Proposed Changes or the work of the ASB.
The Board is also inviting comments at its first public meeting on January 23, 2009 at the Sheraton Yankee Clipper Hotel in Fort Lauderdale, Florida. Other public ASB meetings planned include New Orleans, LA on April 3 and Seattle, WA on September 11, 2009. For more information on these ASB public meetings and for help planning your business valuation conference and education schedule for the coming year, please visit our continually updated BVCalendar.
Subsequent events can be a BV appraiser’s worst nightmare
“The trouble with our times is that the future is not what is used to be.” ~Paul Valery
Never were words truer to the practice of business valuation. Indeed, events that occur long after the valuation date can cause headaches and confusion from the courtroom to the valuation report. Questions that BV analysts must consider: Which events should be given merit? How can you account for subsequent events? How does one distinguish the “known” from the “knowable” or “foreseeable?”
For answers to these questions and a discussion of other “burning issues,” join Jay Fishman, FASA; Jim Hitchner, CPA/ABV, ASA; Mike Mard CPA/ABV, ASA; Shannon Pratt, CFA, FASA, MCBA, CM&AA; and attorney Chuck Rettig on Thursday, January 8 (10:00am-11:40am PT / 1:00pm-2:40pm ET) for a can’t-miss, in-depth discussion at this week’s teleseminar, “Subsequent Events.” This all-star panel will cover uses of accounting guidelines and standards, judicial practices, the practicality of solutions to subsequent event problems, and so much more.
NEW FOR 2009 - Unlimited listeners for CPE and/or CLE credit at no additional charge! Best of all, you can invite your entire office to listen in because we’re now offering unlimited CPE and/or CLE credits for our teleconferences and webinars at no additional charge. Simply purchase one phone line and anyone at your location can listen in, enjoy the session, and earn 1.5 CPE and/or CLE credits. Call 503-291-7963 for information or register online.