The Market Approach and Market DataFebruary 12th, 2010 | Income Approach & Methods | Market Approach | Medicare | Regulatory Matters | Seminars & Publications | Valuing Goodwill
I had several discussions today concerning alternatives to the Income Approach when valuing medical practices for sale to a hospital. At the risk of repeating myself, the hypothetical investor of the fair market value standard is interested in income returns; is risk adverse (see any text book discussion of the CAPM and diversification); views normalization adjustments cautiously, and does not anticipate synergistic opportunities from the investment, e.g., a lower cost of capital than the target entity on a stand alone basis, revenue to the acquirer over and above that available to the target on a stand alone basis, etc. Synergistic expectations are a feature of Strategic Value, not Fair Market Value. As such, they are not consistent with appraisal for the healthcare industry where Stark, the AKS, or tax exemption issues are present.
One issue that sometimes presents itself in an appraisal is the relevance of the Market Approach. My article Healthcare Market Structure And Its Implication For Valuation Of Privately Held Provider Entities: An Empirical Analysis appeared in the Summer 2008 Edition of Business Valuation Review and addresses many of the peculiar issues that exist with this Approach in the Healthcare Industry. In order to use "comparable" transactions in a regulated healthcare valuation, the appraiser must be cognizant of the underlying motivations of the parties who engaged in the reported transaction. If the value of past, present or future referrals were considered in the determination of the transaction price, the data would be "tainted" and not an appropriate source of a multiple, of course. For transactions that are not fully reported – which is just about all of them – there is insufficient data from which the appraiser can assess the motivations of the transacting parties. Furthermore, as I have said many times, "The Plural of Anecdote is not Data." Finally, there is a substantive question as to whether "market" data available only to a restricted audience is appropriate for use in a fair market value appraisal. "Market" data contemplates hypothetical buyers and sellers who have reasonable access to relevant facts. Confidential data is not consistent with that requirement.
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