October 9, 2013 | Issue #133-2  

Valuation land mine: Avoid it like the plague

Proceed with caution when valuing a business arrangement or transaction between a healthcare entity and physicians. If the valuation includes a consideration of anticipated referrals, the hospital or healthcare system making payments under the arrangement could face huge penalties for making illegal kickbacks to physicians. A recent jury award illustrates this trouble spot.

Devastating penalty: The District Court of South Carolina has just ordered a hospital to pay $237 million for violating the False Claims Act. Earlier this year, a jury found the hospital guilty under the Stark Law and False Claims Act of providing illegal kickbacks to a group of local doctors under part-time employment contracts that the government said paid well above fair market value. Although the deals made no mention of referral fees, the government argued that the excess amount was paid to ensure that they would continue to get those fees for clinical procedures. The hospital argued that it had both legal and fair market value opinions that backed up the appropriateness of the employment agreements. However, the jury disagreed. The case is U.S. ex rel. Drakeford v. Tuomey Healthcare Systems, Inc., C/A No. 3:05-2858-MBS (D. S.C.).

The hospital, a nonprofit, single-hospital system based in South Carolina, plans to appeal the court’s judgment. The hospital’s Form 990 for 2011 showed net assets of $124 million, so a judgment amount of $237 million is devastating.

Complex legal picture: Valuations in the healthcare industry are particularly challenging because they must be done within the context of a complex regulatory framework. Under the federal anti-kickback statute, healthcare providers cannot exchange remuneration in return for referrals of federal healthcare program business. The federal physician self-referral law (the Stark Law) incorporates a similar principle by prohibiting certain physician referrals to entities with which physicians have compensation arrangements.

Physician referrals can show up in a variety of valuation scenarios in the healthcare area. The November issue of Business Valuation Update will include an article that fully explains these scenarios and how valuation analysts can avoid trouble over the referral issue.

Private Company Council finalizes two standards

The Private Company Council (PCC) of the FASB voted to finalize two alternatives within U.S. GAAP: (1) accounting for interest rate swaps; and (2) accounting for goodwill in a business combination for private companies. The FASB will discuss the proposed alternatives and also whether they should apply to publicly traded companies and not-for-profit organizations.

The first proposed GAAP alternative, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps, would give private companies (except financial institutions) the option to use a simplified hedge accounting approach to account for certain types of interest rate swaps that are entered into for the purpose of economically converting variable rate interest payments to fixed-rate payments. The alternative would also extend the exemption from certain fair value disclosures to private companies for which such swaps are their only derivatives.

The second proposed GAAP alternative, Accounting for Goodwill Subsequent to a Business Combination, would permit a private company to subsequently amortize goodwill over a period of 10 years, or less under certain circumstances, and to apply a simplified impairment model to goodwill.

Also discussed at a recent PCC meeting was the FASB exposure draft on PCC Issue No. 13-01A, Accounting for Identifiable Intangible Assets in a Business Combination, which modifies the requirement for private companies to separately recognize fewer intangible assets acquired in a business combination. The PCC directed the FASB staff to conduct more research for further discussion at a future meeting.

Global adoption of IFRS: Are we there yet?

“Remarkable progress” is being made in the global adoption of International Financial Reporting Standards, according to Michel Prada, chairman of the IFRS Foundation Trustees. In a survey of 66 jurisdictions (including all of the G20), the IFRS Foundation found the following:

  • 95% have made public commitments supporting IFRS as the single set of financial reporting standards suitable for global application;
  • 80% have already adopted IFRS as a requirement for all or nearly all companies whose securities are publicly traded, while most of the remaining jurisdictions have made significant progress toward use of IFRS;
  • Jurisdictions that have adopted IFRS have made very few modifications to them, while the few that were made are generally regarded as temporary steps in their plans to adopt IFRS (also, in almost all cases, the IASB has active projects on its agenda that will result in an updated version of the standard to which the jurisdiction has made modifications); and
  • More than half of jurisdictions have either already adopted the IFRS for SMEs or are planning to do so in the near future.

Proposed change of jurisdiction for patent cases

Watch out Federal Circuit! In a recent speech at the IIT Chicago-Kent College of Law, Judge Diane Wood, who just rose to Chief Judge of the 7th Circuit Court of Appeals, questioned the wisdom of granting the Federal Circuit exclusive jurisdiction in patent cases. The regional circuits could pick up some of the cases, she suggested.

In her opinion, the rationale for the type of specialty court the Federal Circuit represents may no longer hold up. Patent cases are no more complex than many of the other cases federal judges in all the circuits handle regularly—think environmental or bankruptcy cases. These judges have the benefit of a free exchange of ideas within the circuit and with other circuits, making for a dynamic debate on the issues. The Federal Circuit lacks this process. Also, the Supreme Court has taken on a relatively large number of cases coming from the Federal Circuit, which signals that the stakes are high and a second opinion is desirable.

Judge Wood is on the same circuit as Judge Richard osner, one of the most outspoken critics of the existing patent litigation system. Their differing political orientation—she's a liberal (and often mentioned as contender for a Supreme Court vacancy), and he's a conservative—does not prevent their agreeing on some of the related issues, she says in a recent follow-up interview with Corporate Counsel (free registration required).

Recent DOJ comments add to challenge of valuing cannabiz

Valuation opportunities exist in the legal marijuana business but so do challenges and obstacles. The Department of Justice will no longer target these businesses if they are in states that legalize and regulate the drug, according to an August 29 DOJ memo (see the September 11 issue of BVWire). However, these businesses are not totally out of reach of the long arm of the law.

No free pass: The DOJ is not giving "immunity" to marijuana providers. Federal prosecutors will “aggressively go after any cannabis distributors who bumped up against one of the eight federal priorities laid out in the Aug. 29 memo,” says Deputy Attorney General James Cole, according to a report.

"When we see someone who is marketing marijuana in a way that is going to be attractive to minors, we're going to go after them. If we see someone who is growing or cultivating marijuana so that they can import it or export it out of state, we're going to go after them. If they're involved in drug cartels or illegal enterprises, we're going to go after them," Cole says.

Valuation angle: Providing a rare chance to learn the dangers of valuing sellers and dispensaries of medicinal and newly legalized cannabis in a hazy regulatory environment, Ronald Seigneur (Seigneur Gustafson LLP) and Jim Marty (Jim Marty and Associates LLC), two Colorado-based financial experts, will conduct a webinar, Valuing Marijuana Dispensaries, on October 24.

And we’re sure this topic will come up when Seigneur and James Hitchner present a session, Hot Topics in Business Valuation, at the October 13-16 ASA Advanced Business Valuation Conference in San Antonio. BVWire will be there—we hope to see you!

Business valuation industry mourns pioneer
Glenn M. Desmond

On a sad note, long-time appraiser Glenn M. Desmond has passed away. Glenn was a consummate entrepreneur, starting successful real estate and business appraisal firms in Maine and Los Angeles.

Glenn was also the author of numerous books on business valuation, publishing the first in the 1970s, a time when books on this subject were scant. They included Business Valuation Handbook, Handbook of Small Business Valuation Formulas and Rules of Thumb, and How to Value Professional Practices. He also became one of the country’s preeminent expert witnesses on business damages.

In 1975, Michael C. Wierwille, now managing director at Duff & Phelps, was a young apprentice appraiser of machinery and equipment when he joined Glenn in the Los Angeles office of the Corporate Appraisal Co. (later acquired by Valuation Research Corp.). Under Glenn’s tutelage, Wierwille soon was learning to value real estate and business goodwill.

“What Glenn did as a colleague, a boss, and a mentor, was to always guide the people who worked with him to achieve the best that they could,” Wierwille remembers. “Glenn was a tremendous individual who left a warm and lasting impression on everyone he met. But it was his thought leadership in appraisal techniques that wouldn’t be written about for years to come that set him apart. He realized that the corner grocery store was more than bricks and mortar, but an assemblage of assets, both tangible and intangible, that needed to be valued.”

As for his legacy to the BV profession, Wierwille says: “He recognized the common denominators in the field of appraisal, taking real estate valuation principles and evolving them into business valuation principles. Whether it be machinery and equipment, real estate, or business enterprises, they’re all fundamentally valued in similar ways. Glenn picked up on that very early on.”

BVWire extends its deepest condolences to the family and the many colleagues and friends of Glenn Desmond.

Excellent agenda at Minnesota BV conference November 1

A super lineup of topics and speakers has been set for the Minnesota Society of Certified Public Accountants Business Valuation Conference on November 1 in Plymouth, Minn. BVR is proud to sponsor this event, which will include sessions on DLOM methods, commercial damages engagements, unique characteristics of divorce valuations, valuing professional practices and licenses, best practices for S corporation tax affecting, and more.

Speakers include Michael Gregory (Michael Gregory Consulting LLC), James Hitchner (Financial Valuation Advisors Inc.), Jennifer Loeffler (Value Consulting Group), Ronald Seigneur (Seigneur Gustafson LLP), and other prominent professionals.

For more details, check out the agenda.

Former IRS manager shares valuation insights

Michael Gregory (Michael Gregory Consulting), former IRS territory manager, will lead an intensive four-hour interactive workshop on how the IRS treats S corporations, FLPs, DLOMs, and DLOCs and how appraisers can navigate the IRS review process. You don’t want to miss the Advanced Workshop on Estate & Gift Valuations for the IRS (October 10).



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