• By Achille Ekeu, MBA, CVA

Professional Practices valuation is similar to the valuation of any small business that depends on a key person or few individuals and that often uses cash-basis accounting. They are mostly service businesses and possess very limited tangible assets.Great relationships with their clients and great reputation in the community are the basis of their success.

Professional Practices include: Medical Practices, Dental Practices, Law Practices, CPA Firms, Architecture and Engineering Firms.We will discuss the valuation of all these professional practices in this new series starting this month with Medical Practices.

Medical Practices

This industry is rapidly changing, complex and highly regulated. Some trends that influence their valuation are:

1- According to First Research, Inc., only 20 percent of patients constitute physician services that operate on an outpatient basis. Meanwhile, the healthcare sector generates upward of a trillion dollars in annual revenues.

2- With more than 200,000 physician offices in the US, and an annual compounded growth rate of 7% from 2006 to 2013, it is estimated that the employment growth in this sector will be of 17.1% in the 2006 – 2016 decade.

3- Healthcare providers depend on reimbursement rates from third party insurers like Medicare, Medicaid, and Managed Care Organizations.

4- With the Affordable Care Act (Obamacare) being implemented at this time, data are not yet available to measure the impact of the new law on the industry.

5- With the rapid growth of medical expenses ongoing, managed care organizations reimburse based on the number of patients covered rather than on the particular services rendered.

6- Due to the increased number of physicians, administrative and regulatory burden, and the competition from managed care organizations, many solo physicians are moving to corporations or group medical practices.

7- Although some publicly traded practice management companies went through financial hardships, they still have access to capital markets, excellent management and managed care expertise.

8- Due to complex regulations in the healthcare industry, high federal government oversight, and increased scrutiny by the IRS status of tax exempt organizations (IR Code 501c3), selling medical practices is more challenging than ever before. Valuation analysts must be very aware of changes in the industry particularly guidelines to prevent fraud.

For valuation of medical practices for acquisition by hospitals, the valuation analyst must pay particular attention on the physician’s compensation under the contract agreement. When using the income approach keep in mind that the more the future physician’s compensation the lower the cash flow to the hospital-owner, and thus the lower the fair value of the practice.

Achille Ekeu, MBA, CVA

President/CEO

The Washington Valuation Group.

www.washingtonvaluation.com

A Certified Valuation Analyst and Member of the National Association of Certified Valuators and Analysts (NACVA) in the DC-MD Chapter. He is also a Management Consultant Member of the Institute of Management Consultants (IMC-USA) in the National Capital Chapter. He also serves as an IMC-USA National Academy Committee Member.


  • Achille Ekeu, MBA, CVA

A leasehold interest is an interest in land or equipment in which a lessee or tenant buys the right to occupy or use the land or property for a specified period of time from a lessor under the terms of a lease contract. Most small businesses sign a long term lease that allows them as well as the lessor to have a peace of mind knowing that they have a fixed rent expense for the length of the lease.

This has a big impact on the company’s cash flow and affects the company’s long-term strategy. Due to increases in real estate values over the years, a fixed rent for a determined period of time provides certainty, peace of mind as well as financial advantages (savings in the long run) for the company.

In a valuation engagement how does a lease agreement affect the value of the business?

To answer this question Let's take an example: How to determine the value of a favorable lease?

Take the Present value of the benefits over the term of the lease contract, discount it to the present using a discount rate similar to the rate the lessee would be subject to under similar terms as those contained in the lease agreement.

For Example: ABC Firm leases its headquarters offices from Offices Inc. The lease agreement is a triple net lease (lessee is responsible for real estate taxes, net building insurance, and all common area maintenance) requiring ABC Firm to pay Offices Inc. $25,000 a month for 120 months. A Member of the Appraisal Institute (MAI) analysis of lease rates in similar locations for this type of building is approximately $30,000 a month under similar terms. The estimated annual incremental borrowing rate for ABC Firm for similar debt is 15%.

Calculation:

FMV of Lease Payments $30,000

Less: Existing Lease Payments - $25,000

Monthly Benefits $5,000

Multiply by: Present Value of a monthly annuity

for 120 months @ 15% annual rate x 61.983

Value of Leasehold Interest: $309,914

Leases can be classified either as operating leases or capital leases. As operating leases, lease payments are considered operating expenses which reduces operating and net income although they are tax deductible. As capital leases, they are treated like assets subject to depreciations and the imputed interest payments on the lease are tax deductible instead of the lease payments themselves.

As you can see the reduction on net income has a direct impact on the value of the company.

Achille Ekeu, MBA, CVA

President/CEO of The Washington Valuation Group. A Certified Valuation Analyst and Member of the National Association of Certified Valuators and Analysts (NACVA) in the DC-MD Chapter.He is also a Management Consultant Member of the Institute of Management Consultants (IMC-USA) in the National Capital Chapter. He also serves as an IMC-USA National Academy Committee Member.