Huge, historic healthcare debate: takeaways for BV analysts

“The potential for a major overhaul of the U.S. healthcare system has introduced considerable uncertainty into this segment of the economy—and uncertainty is a key source of industry-specific risk and even more importantly, subsector and specific-company risk,” says Mark Dietrich, discussing the debate on healthcare in Congress, which reconvenes on September 8th. Notable issues include:

  • Cutbacks in payment for high-tech imaging;
  • Enhanced payment for primary care physicians at the expense of specialists;
  • Limitations on specialty surgical hospitals;
  • Elimination of Medicare Advantage; and
  • Potential Massachusetts-style ‘play or pay’ mandate for employers with economy-wide implications.

“Perhaps the most significant unspoken reform is the potential to impose a uniform system of benefits and pricing on a nation with widely divergent local market conditions,” Dietrich tells the ‘Wire. “This and all these important potential changes will have a critical impact on value.”

Get the most comprehensive guide. BVR’s Guide to Healthcare Valuation offers keen insights into the all the medical industry subsectors to enable BV analysts to account for evolving healthcare reform factors in their current conclusions of value. 

Expert authors include Todd Sorensen, Ambulatory Surgery Centers; Carol Carden, Dialysis Clinics, Don Barbo, Hospitals; Greg Anderson, Physician On-Call Arrangements; Tim Smith, Fair Market Physician Compensation; Kathie Wilson, Divorce Valuation; and Mark Dietrich on Medical Practices and Healthcare Markets. Mark and Todd will be on a Healthcare Panel at the ASA Advanced BV Conference in October, and Carol, Don and Mark will present healthcare valuation at the AICPA Business Valuation Conference in November (see “Get Ready…” item below for conference updates).

Mountains of misinformation.  Until then, for continuing insights into the “misinformation, disinformation and overall lack of information” regarding the healthcare debate, Mark invites al BVWire subscribers to check out his blog.

DLOM survey reveals both consensus & need for consistency

Last week’s survey on current methods for calculating the discount for lack of marketability (DLOM) garnered more responses than any other BVWire poll. Highlights include:

  • Separate discounts: Nearly all (98.1%) of the respondents quantify separate discounts for a minority interest and lack of marketability when the valuation requires both.
  • Majority apply Mandelbaum: The vast majority of participants (83%) say that they “routinely” consider the ten Mandelbaum factors in determining DLOM. Many prefer not to cite the specific case, but consider the factors “a reflection of sound valuation process… and the written responses [to the survey] show that even the respondents who don’t explicitly consider the Mandelbaum factors do so implicitly in many instances.”
  • Transfer restrictions are key. Of all the Mandelbaum factors, “restrictions on transferability” is one that nearly all (98.7%) respondents consider. The factor with the lowest response rate (39.7%) was “costs associated with a public offering.”
  • Restricted stock studies most common. Nearly 90% of respondents rely on restricted stock studies, making this the most commonly used DLOM method, followed by IPO studies (52.3%) and “other” (26%) Only 18.2% rely on DCF methods (QMDM, e.g.) or option pricing models (16.9%). Three respondents reported using LEAPS, an option method, in their comments.

But have you considered? “For investment-oriented entities (FLPs, etc.), it may make sense to aggregate a combined discount for minority interests and lack of marketability, due to data limitations on estimating separate discounts,” say Arthur Rosenbloom and Bala Dharan, both with CRA International, who drafted the survey. “A minority interest generates impaired marketability. We use the two only for convention; they are multiplicands and we end up with one discount.” Further—although shares of a private company will most always lack marketability, only some shares lack control. “Hence the two discounts are always separate issues.”

More insights from Rosenbloom and Dharan—including estimating DLOM for pass-through entities, and the enduring popularity of restricted stock and IPO data, despite some degree of discredit among the courts and IRS—will appear in the next (October 2009) Business Valuation Update™. They’ll also respond to the more interesting, opinionated written comments. To participate, click here.

When non-owning spouse signs buy-sell, is she bound by value in divorce?

Yes, according the Tennessee Court of Appeals in Inzer v. Inzer, 2009 WL 2263818 (July 28, 2009). Although its decision is non-binding on other states, to resolve the issue of first impression, the court looked to the current majority view (adopted in Tennessee), which holds “the value established in the buy-sell agreement of a closely held corporation, not signed by the non-shareholder spouse, is not binding on the non-shareholder spouse but is considered, along with other factors, in valuing the interest of the shareholder spouse” (emphasis by the court).  Accordingly, the application of the majority rule depends on whether the non-shareholder spouse consented to the terms of a buy-sell.
In this case, the wife signed a formal acknowledgment of the husband’s franchise operating agreement, including its restrictive repurchase provisions (book value, depreciated assets, no goodwill, etc.). Although it was difficult to reconcile how the husband could earn upwards of $150,000 per year from an entity interest that the buy-sell agreement priced at only $33,000, the court nevertheless found that because the wife signed off on it, the buy-sell bound the trial court’s determination of value.
A complete abstract of the court’s decision will appear in the October BVUpdate, and the full-text of the court’s opinion will be available at BVLaw™.

Hear more on the current, critical issues in divorce. The effect of a buy-sell, the impact of the current economy, what lawyers expect and judges demand from BV experts—these and more will be covered by the BVR/NACVA/ASA 2nd Annual Summit on Business Valuation in Divorce. A preeminent lineup of top BV experts, judges, and lawyers will present the best standards of BV divorce practice on Sept 24-25 in Chicago. The deadline for early-bird discount pricing is Friday! To view the final agenda, click here.

Vet practice valuation—connecting the chains of value

While veterinarians and other animal healthcare specialists have diversified greatly to meet the expansive variety found amongst their patients (and the needs of their caretakers—for emergency services, pet insurance and specialty products, and consolidated care), appraisers charged with finding the appropriate value of these expanding practices have yet to find such a degree of specialized data, methodology, and application. Indeed, making sense of the various veterinary practice types, their value- and business-drivers, and tricky issues such as distinguishing (and allocating) personal vs. professional goodwill values can pose difficult challenges to BV appraisers.

Earlier today, a triumvirate of veterinary valuation experts provided hands-on guidance to lead business appraisers through this varied and troublesome arena in “Veterinary Practice Valuation: Transactions and Transitions in Today’s Markets,” a 100-minute teleconference. Veterinary practice broker David Greene and Doctor of Veterinary Medicine Byron Farquer joined Cindy Eddins Collier, co-editor of BVR’s Guide to Healthcare Valuation, to present and discuss all the ins, outs, and need-to-knows of veterinary practice valuation, including a vet practice market summary and “Adjustment Factor Worksheet,” prepared exclusively for conference attendees.

To order a copy of the transcript and recording, plus materials, click here.

Get ready for a bustling fall BV conferences

It’s already September—and for many BV professionals, that means an end-to-summer, “back to school” mindset that encourages continued education on cutting-edge topics and reconnection with professional peers. In addition to the BV Divorce Conference in Chicago (above), consider attending these conferences for adding CPE and business development credits:

  • Only two-weeks left in ASA ‘early bird’ pricing: Early registration for the American Society of Appraiser’s Advanced BV Conference in Boston closes on September 14th. Signup for the $75 discount now and on October 19-21 enjoy concurrent sessions on niche and hot-topics, fair value and practice management. Don’t miss the “spirited discussion” of total beta vs. beta, moderated by Roger Grabowski. Download the brochure or register here.
  • More than one approach to DLOM may be necessary. Our latest online survey (see above) is just one of the many platforms for provocative debate taking place October 9th at the 2nd Annual University of San Diego School of Law, Business Valuation and Tax Conference in San Diego. Register now to take advantage of the early-bird price discount, ending September 9th.
  • Hands-on valuation training at AICPA. The 2009 AICPA National BV Conference in San Francisco promises an information-packed, 3-day event, November 15-17, featuring “must-have” valuation strategies and best practices for forensic accounting, management forecasts, fair value, BV fundamentals, litigation consulting, etc. Click here to read more and register.

IASB updates response to G-20 recommendations, FASB moving forward on financial instruments proposals

Last week the International Accounting Standards Board (IASB) and the International Accounting Standards Committee (IASC) Foundation released a comprehensive overview of measures they and the Financial Accounting Standards Board (FASB) have undertaken to respond to the recent G-20 summit (April) in London. Entitled, “Strengthening Transparency and Accountability,” the six-page table summarizes proposals relating to financial instruments, fair value, financing receivables (including loans), and credit-loss allowances. Comment deadlines for many of these are closing in, this month and next. To view the complete summary, click here.

In the meantime, the deadline for comments to FASB's proposed standard on Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses closed last week. The board has posted 68 comments, ranging from the first letter —a register of strong support from FASB's Investors Technical Advisory Committee—to the second and third letters, from domestic banking associations, which predictably do not. More upcoming comment deadlines on FASB /IASB proposals related to financial instruments, culled from FEI Financial Reporting Blog:

Do PE portfolio managers need a valuation primer?

Writing in his daily blog on August 31st, peHub Wire editor Dan Primack comments on the current “disconnect” between PE portfolio values and current market values:

“Dear reader: I plead appalling naiveté when it comes to mark-to-market accounting. You see, I had assumed that FAS 157 would result in private equity firms using public market comps when valuing their portfolio companies. As such, my theory was that the S&P 500 losing more than 11% of its value in Q1 would be coupled by double-digit declines among typical PE portfolios. When that same index rebounded in Q2 by more than 15%, we’d see some corresponding leap in PE portfolios. Not a perfect mirror, of course, but at least something reflective. Silly me…

New data from Cogent Partners shows that the median buyout fund write-down was -2.1% in Q1 2009, while the median VC fund write-down was -2.8 percent. In fact, only 15% of all funds examined by Cogent reported a percentage decline greater than that of the S&P 500.

Cogent also found a lack of private/public correspondence in Q2, when the median buyout fund was written up at 1.1% and the median venture fund was written down by -1.2 percent. (Note: Q2 sample sizes are smaller)

Does this mean that private equity firms (and their accountants) are simply eschewing public market comps, in favor of static conservatism?”

Or does this mean that Primack (and the media in general) need a primer? Most valuation analysts will agree that mark-to-market accounting for fair values of private portfolio companies is far more complex than consulting the public market for “mirror” values. What do you think? Send comments to the BVWire editor. We’ll be taking a hiatus for the Labor Day holiday, so look for our next issue on September 16, 2009.


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