Three free & must-see resources improve HC valuation reports
At last month’s NACVA/IBA confab in Boston, Mark Dietrich presented “Tricks and Traps in the Valuation of Medical Practices, Compensation, Local Markets, and Cap Rates.” In this informative session, Dietrich—co-editor of BVR's Guide to Healthcare Valuation—provided attendees with sources BV experts can use to find information to bolster healthcare-focused appraisal reports. A few to note:
- Kaiser Family State Health Facts. In addition to excellent statistics on all things healthcare, this resource includes a chart showing Nonfederal Physicians per 1,000 Population in 2008 and the concentration of physicians in the Northeast U.S.
- Centers for Medicare & Medicaid Services. Table 23 of the 2007 CMS Statistics, “Practitioners per CMS Region,” shows the number of practitioners per 100,000 population.
- Merritt Hawkins & Associates. Their 2008 Survey of Primary Care Physicians is another must-see.
One of Dietrich’s top takeaways: Remember to scour all relevant data sources on the healthcare profession and incorporate significant portions in your report before you finalize it.
Survey offers valuation benchmarks on ambulatory service centers
Within the healthcare industry, ambulatory surgery centers (ASCs) are some of the most common physician-owned entity types. Consequently, there is frequently a need to determine the value of these shares as new physicians buy-in and retiring physicians depart. With this in mind, HealthCare Appraisers, Inc. developed a valuation survey in 2002 specific to ASCs. In each of the past six years, they have surveyed key management and development companies operating in the ASC industry to identify trends in both the pricing of ASC ownership interests and the management fees charged to ASCs by management companies.
For key findings on the 2009 Valuation Survey: How do ASC Companies Assess Value, visit our Free Resources page to download an insider’s analysis of the data authored by Healthcare Appraisers, Inc.’s Jason Ruchaber and Curtis Bernstein from the June issue of Business Valuation Update™.
ASA ponders enhanced relationship with CICBV and RICS
In his recent “message from the chair” column, John Barton, vice chair of the American Society of Appraisers (ASA) Business Valuation Committee, offered an update to members on the “conversations and activities” between the ASA and the Canadian Institute of Chartered Business Valuators (CICBV) and the Royal Institute of Chartered Surveyors (RICS). According to Barton, the “ASA is weighing the advantages of two different opportunities—1) joining an “umbrella” international “organization of BV organizations” co-founded by ASA-BV and the CICBV; or 2) merging ASA into RICS.” (The chair’s message offers details on a proposed collaboration, pros and cons associated with each option, and insights on how such an arrangement would work.)
ASA president, Ron Seaman, has named committees to consider each of these options. According to Seaman, “the committees will be reporting to our Board of Governors at our International Conference in Orlando on July 12, but, at this point, neither opportunity (CICBV or RICS) appears to me to be close to a decision or to fruition.”
Back by popular demand! The Guideline Public Company Method Workshop with new insight from the experts
We all keep an eye on the market. Nevertheless, as appraisers, how can we apply what we learn from our brokerage statements to what we need in our determinations of value—particularly in times of volatility? At the extremely popular “Guideline Public Company Method Workshop” recently hosted by BVR in Miami, Rob Schlegel, a principal at Houlihan Valuation Advisors and an outstanding ASA instructor, addressed these issues and more. For those who missed this opportunity, BVR is offering “Guideline Public Company Method Workshop Highlights,” on Wednesday, July 8 at 10:00am PT/1:00pm ET. After the broadcast of best moments from the Miami workshop, Schlegel and Linda Trugman, vice president of Trugman Valuation Associates, Inc., will join us for live, hands-on instruction, case studies, Q&A, and more. Two CPE credits are available for this 100-minute presentation. To register, click here.
Is a court-appointed, neutral expert immune from malpractice?
When a Minnesota couple filed for divorce back in 1996, they and their respective counsel agreed to have a neutral expert evaluate their interests in two home-building companies. The trial court provided a “list of neutrals,” but the parties’ first selection withdrew—due specifically to concerns about their lack of cooperation. A second neutral expert agreed to serve only if the court appointed him per Rule 706 of the local rules of evidence (which like many state versions, reads analogous to Rule 706 of the Federal Rules).
The parties agreed and their attorneys drafted a stipulation for his retention, which the court entered as an order. The wife retained a consulting CPA to review the neutral expert’s report, who pronounced his methodology “proper.” At no time did she object to the neutral’s appointment, and her attorney cross-examined him at trial. The trial court ultimately based its 50/50 allocation of the businesses on the expert’s valuation.
Nearly 10 years later, the wife sued, alleging the appraiser (and his firm) breached their contract and committed malpractice. The trial court dismissed the claims on summary judgment, finding that the court-appointment gave the appraiser quasi-judicial immunity. The Minnesota Court of Appeals reversed, essentially concluding that the valuation expert served the clients, not the court. The appraiser took his claims to the State Supreme Court, which reversed again. Even though neither the parties’ stipulation nor the court order specifically cited Rule 706 or used the word “appointment,” the conduct of the neutral evaluator and the parties—plus public policy considerations—supported extending immunity to all experts appointed under local Rule 706.
The case is not binding authority on other jurisdictions, of course, but it does contain a nice “laundry list” of requirements that all 706 appointments should meet to comply with the rule, which might then support a granting of immunity in cases outside of Minnesota. Look for a full abstract of Peterka v. Dennis, 2009 WL 1228506 (Minn.)(May 7, 2009), in the August 2009 Business Valuation Update™. In addition, the full text of both the Minn. Court of Appeals’ and Supreme Court’s decisions will be available to subscribers of BVLaw™.
Insights on a common error made by new BV appraisers
Where do you get your cap rates under an excess earnings method? It’s a question that came up at the recent BVR teleconference, Valuing Dental Practices, featuring BV experts James Andersen, Ron Seigneur, and Stephen Persichetti, a practicing dentist and professor of dental practice management. In answer to the query, one panelist explained, “When you're using excess earnings, it's appraiser's judgment. I’ve seen reports that use Ibbotson or D&P. But your cap rate has to be larger, and sometimes significantly higher, as much as 40% and 60%.”
The BVWire™put the question to Seigneur, who cautioned, “There is no holy grail for developing the capitalization rate under the excess earnings method.” That said, he offered the following insights as a “reality check” for BV experts:
When breaking the economic returns of an enterprise out between the returns on tangible assets and the returns on the intangible assets, it is commonly accepted theory that the returns on the tangible asset base is less risky, and therefore, require a lower economic return to justify the risks associated with the tangible assets. On the other hand, the rates of return required for each class of assets (be they tangible, like cash, inventory, fixed assets, etc., or intangible, such as the reputation of the business, the customer base, etc.) must collectively reconcile to the overall economic return (e.g. capitalization rate) on the overall, all in, benefit stream of the entity.
If the enterprise is assumed to justify a 30% overall capitalization rate, the returns on the various categories of tangible assets will likely each be below this 30% combined return. The returns required to capture the risks of the various intangibles will likely each be above 30%, with the overall weighted or blended rates tying back to the 30% overall risk adjusted rate associated with the entity take as a whole.
Recommended reading for BV experts
The May 2009 AICPA Journal of Accountancy is chock-full of interesting articles on a range of valuation-related topics, including a virtual roundtable discussion “Valuations for Financial Reporting in Today's Market,” featuring experts from the financial reporting sector: Dave Dufendach, Mike Morhaus, Bernard Pump, Carolyn Worth, and Kevin Yeanoplos. Another informative read: The spring 2009 issue of IPA's BusinessToday includes a compelling article outlining recognizable signs that a business is failing. According to the author, “signs come in three stages: early, middle, and late.” It is definitely worth the quick read and the time needed to share it with interested clients.
No BVWire next week
Due to the Fourth of July holiday, your next BVWire will appear on Wednesday, July 8. Have a great holiday and glorious summer!
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