May 15, 2013 | Issue #128-3  

Readers respond to issue of M&A valuations

In last week’s BVWire, an item titled “Are Certain M&A Targets Being Overvalued?” cited a study that revealed that most private-target M&A deals have problems after the closing, including price adjustments favorable to the buyer. Several readers added their insight into this phenomenon.

“Anyone experienced in business sales usually understands the seller endeavors to maximize sale price and the buyer attempts to protect from overpaying for the entity,” said one reader. “The statistics seem to reflect these differing objectives and not necessarily a bad valuation process.”

Another reader points out this angle: “The problem with post-closing items being in favor of buyers is due to an information and experience imbalance between buyers and sellers,” the reader said. “Most of the time, the acquirers are professional buyers with great skill. A privately held business might be sold once in a lifetime, so we have professional buyers negotiating against novice sellers.”

An astute reader adds: “I've been at M&A sessions where buyers discuss using due diligence and the recourse elements of an asset purchase agreement as standard negotiation techniques,” he said. “So, yes, if you just take the stated purchase price you're probably overvaluing these days. Pratt's Stats is helpful here because it provides full data on contingent payouts and terms. Also, many announced deals fail to close at the last minute because buyers try to negotiate as the lawyers assemble. This is another reason why appraisers need to be very careful not to use announced deal comparables.”

Echoing this notion, another reader adds: “From my experience with deals, this is a common issue, and has always been a great concern of mine when relying on market transactional data."

Our thanks to all readers who commented on this issue.

Jury ‘annihilates’ hospital over paying doctors more than FMV

Healthcare valuation professionals must navigate a complex regulatory scheme to avoid violations of the anti-kickback statute and the Stark Law. Both seek to prevent kickback payments to physicians based on the volume and value of their referrals. A valuator must demonstrate a thorough understanding of critical statutory terms such as “remuneration,” “financial relationships,” and “fair market value” when assessing a physician compensation arrangement. Missteps may be costly, as one hospital just found out.

The case began as a whistle-blower action when an orthopedic surgeon claimed the hospital’s “unusual” part-time employment of 19 surgeons violated the Stark Law because compensation depended on the volume and value of referrals. The hospital contended it had legal and fair market value (FMV) opinions that proved the appropriateness of the arrangements.

Retrial leaves courtroom speechless. In March 2010, a federal jury found the hospital liable and awarded $44.9 million in damages to the government. In March 2012, the Court of Appeals reversed on other grounds and remanded. On retrial, the government presented an expert to show that the physicians received total compensation that exceeded the physicians' collections for services personally performed pursuant to the agreements. It argued that the excess compensation was to ensure that the physicians would continue to get referral fees for the clinical procedures. The jury agreed and assessed damages related to Stark Law violations in excess of $39 million.

Because the jury also found the hospital violated the False Claims Act (FCA), there will be additional monetary penalties, to be determined later. Under the FCA, the federal government can recover from $5,500 up to $11,000 per false claim and up to three times the monetary value of those claims.

According to a local report, a “visceral silence” fell over the courtroom when the verdict was read and the hospital’s CEO appeared “physically shaken.” In his closing argument, the defense lawyer said a verdict against the hospital would "annihilate" the organization. According to reports, total potential penalties could exceed $350 million. The hospital’s IRS Form 990 for 2011 showed net assets of $124 million.

The case is U.S. ex rel. Drakeford v. Tuomey Healthcare Systems, Inc., C/A No. 3:05-2858-MBS.(D. S.C.). Tuomey is a nonprofit, single hospital system based in South Carolina. More coverage on this landmark case will appear in future issues of BVWire as well as the BV Update.

Regulatory matters, including the Stark Law, and how they impact healthcare compensation valuation are fully examined in the BVR/AHLA Guide to Healthcare Industry Compensation and Valuation.

Top three growth areas for BV firms

Business valuation firms we recently surveyed say the estate and gifts area was the fastest growing in 2012, according to the results of BVR’s upcoming 2013 BV Firm Economics and Best Practices Guide.

Ranked second and third were the family/matrimonial and damages/lost profits areas, respectively. However, this pecking order may not last through 2013. That’s because many respondents noted that the increase in estate work was due to the uncertainty surrounding estate tax policy in 2012. Most firm leaders BVR has discussed this topic with do not expect a repeat of activity in the estate and gifts area in 2013.

Meanwhile, one of the growth engines for BV firms since the middle of the last decade—fair value for financial reporting—began to sputter. It ranked fourth in 2012 in terms of fast-growth areas, down from its number-one spot in 2010. Fewer BV firms reported more of that kind of work—for purchase price allocation, impairment testing, incentive compensation, or other reasons.

Our thanks to everyone who participated in the survey, which collected data from about 250 complete responses, representing firms with 2,000 business appraisers, on a variety of issues. We will provide further results and analyses here in future issues of BVWire and also the BV Update. The Guide will be available this summer at

Online valuation tools target coming boom

Providers of online business valuation tools for small firms are hoping to cash in on the coming boom in businesses being put up for sale. As baby boomers age, small businesses are expected to go on the block in record numbers, according to a report by Fox Business. These firms often can’t afford traditional valuation services, so they may turn to online tools to value their firms.

The Federal Reserve predicts 7.7 million businesses will be bought and sold in the next 10 years, potentially representing $3 trillion in value, Michael Carter ( said in the report. According to Carter, small companies often end up undervaluing their businesses by 30%. is a provider of online valuation tools., which partners with Intuit in small business services, also offers an online valuation tool aimed at small business.

What has been your experience with these online valuation tools? Have they taken business away? Have you ever had to pick up the pieces for a client who used them? Send your comments to the editor here.

Hot topics trigger CPE events

In the wake of the landmark Tuomey decision (see above), now’s the time to get up to speed on key concepts on valuation in a healthcare setting. The 2013 Online Symposium on Healthcare Valuation continues on May 29 as series curator Mark Dietrich and expert attorney James Pinna (Hunton & Williams) present Commercial Reasonableness and FMV in Healthcare Valuation. Find out why consensus and guidance on commercial reasonableness is still elusive, what increased government commentary on the issue means for appraisers, and how stipulations in Stark, anti-kickback statutes, the False Claims Act, and 501(c)(3) status impact appraisers and appraisals.
The Advanced Workshop on Cost of Capital, featuring Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) and Ron Seigneur (Seigneur Gustafson) has been rescheduled to Thursday, Aug. 8, 2013. Attendees will hear these two BV Hall of Famers on the most pressing issues facing cost of capital determination today.


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