The Practical Use of a Medical Practice Appraisal
Practical use of a medical practice appraisal
Whether you’re an associate doctor buying into a practice or a retiring doctor selling to a hospital, getting a handle on what a practice is worth can be complicated. Added to the complexity is a potentially arduous negotiation process, deal structuring, and financing. Knowing when and how to approach the appraisal process may not always be clear. Is a comprehensive formal appraisal report needed or can I accomplish the same goal with a letter form report? And what’s the difference? Setting a clear approach and expectation when seeking an appraisal will make the process easier. It will also allow you to chose the right appraiser and apply the valuation to a practical use.
Where do you stand?
Understanding your position as a stakeholder in the deal will help you gauge the appraisal’s potential role. Are you the Seller who has agreed with a Buyer in good faith to accept the conclusion of a single appraiser? Maybe you’re an associate buying into a practice and completely disagree with the Seller (who also happens to be your boss). Are you selling to a hospital which is incapable or unwilling to pay for goodwill and intangibles? Recognize where you stand as a player, what you need to accomplish, and how an appraisal might impact that position. Calibrating your expectation based on the current situation is important when going into the appraisal process.
Will the appraisal speak for me?
An independent appraisal may end up strengthening or weakening your argument, but it cannot advocate your position. It is simply the appraiser’s unbiased opinion of value and judgment based on available information under a set of circumstances. The investment value of a practice to a specific buyer can be different than the fair market value opinion. How you end up using the appraisal is arguably the most important factor. Will you use it as a bargaining chip, a counter argument, or a tool to set the asking price? From a practical perspective, an appraisal is only as good as the application of its use. Actually understanding the contents and reasoning in the report will allow you to wield it effectively. Do not hesitate to ask your appraiser questions about particular terms, formulas, and methodologies. Attaining an understanding of these ideas can aide you in conveying a more credible position in negotiations.
Appraisal as a negotiating tool
One approach is to use the appraisal as a negotiating tool. I often see this when I am retained to appraise a practice where the Seller is comparing offers from a hospital and a conventional buyer. Due to regulation or aversion, many hospitals simply do not pay for goodwill or other intangibles. While a hospital may be constrained in this manner, an appraisal showing the fair market value of the practice inclusive of intangibles can be compelling. The realization of what another hypothetical buyer may be willing to pay for the practice can be a convincing argument to sweeten the deal. However, this requires the Seller (or their transaction advisor) to use the data and reasoning as an applied tool. The appraisal can’t just sit on a shelf. A medical practice appraisal does not determine a price or deal structure, rather it’s a conclusion of value based on the appraiser’s unbiased opinion and judgment in applying specific methods. Realization of practice value is ultimately determined by the specific set of circumstances at hand.
What is documented in an appraisal?
Various factors can impact practice value including business, economic, and market conditions. A good appraiser will have the depth of knowledge to examine the practice’s detailed historical and current financial data in the context of an array of factors including medical specialty, physician supply and demand, payor mix, regulatory environment, regional dynamics, and risk premia. A medical practice appraiser will have specialized knowledge of healthcare systems to distinguish these factors which a general business appraiser may overlook. An appraisal will document this logic in a comprehensive report tailored to suit the specific need of the valuation engagement. A report may be longer or shorter based on the depth of analysis desired by the client. Know what type of reports your appraiser offers and what they involve.
Timeline for completing the valuation
Are you a seller conducting pre-sale planning and have a full year before bringing the practice to market? Are you buying a practice and have 30 days to cram the due diligence after signing a letter of intent? Knowing your appraiser’s ability to deliver an appraisal report in a timely manner is important. An appraiser’s competence and qualification should be the first concern, but their ability to perform can affect your bottom line. Also recognize your own responsibility in being prompt. Getting the necessary documents to your appraiser will affect the delivery date. Many of the same items used for due diligence and financing will also be required in the valuation process so keep these documents organized and accessible.
Preparation and timely decision making
Buying and selling a practice involves prudent preparation and time sensitive decision-making. Determine whether a medical practice appraisal is an effective tool in gearing up for this process and understand when and how to use it. If you do proceed with a valuation, set goals and expectations to keep you on track and maximize your resources. An appraisal can function as a crucial building block in the nexus of a deal. A transaction can be long and laborious so every step in preparing for it is a distinct advantage in getting the deal you want.
Christopher Majdi, MSCHA, CHBC is an appraiser at Medical Practice Appraisers, a division of medical practice merger and acquisition firm Transition Consultants. Mr. Majdi provides transaction advisory and healthcare business appraisal services to physicians, medical groups, hospitals, and equity groups nationwide. He is a Certified Healthcare Business Consultant and a Member of the Institute of Business Appraisers. He can be contacted at 800-416-2055 (x223)