Tips for Attorneys

Welcome to our web page designed specifically for the needs of attorneys with respect to valuation. The links below lead to discussions of specific topics that often create confusion and should bridge the understanding gap between legal counsel and valuator.

What some leading experts have said about the first edition of the Medical Valuation Practice Guidebook:

This book is a masterpiece! It provides excellent discussions regarding the important nuances of managed care and physician practice acquisitions. Perhaps most importantly, Mr. Dietrich brings within the reach of lawyers extraordinarily complicated concepts about valuation and the valuation process.

Robert Fabrikant, Esq., former Chairman of the HealthCare Practice of Sidley & Austin, co-author of Health Care Fraud, Enforcement and Compliance by Fabrikant, Kalb, Hopson & Busy, published by the Law Journal Press

Medical Practice Valuation Guidebook 2001/2002 is an indispensable volume for lawyers involved in the valuation of medical (or health care) practices. It makes a complex subject comprehensible. The companion Valuation Tips for Attorneys summarizes key concepts and then tells the attorney how this information is used in practice. A few minutes reading this text will reward the effort many times over.

Ron Brown, Editor American Journal of Family Law and Editor Valuing Professional Practice and Licenses: A Guide for the Matrimonial Practitioner, 3rd ed., both published by the Aspen Law and Business

Valuation Checklist for Attorneys!

 

A feature of the all-new Valuation Tips for Attorneys, the Companion Guide to the Medical Practice Valuation Guidebook, scheduled for release in 2001, offers a convenient tool for thorough analysis of valuation experts and their reports.

Check here for occasional pre-releases of other portions of Valuation Tips for Attorneys.

To view the Checklist in HTML format, click here.

To download in MS Word format, right click here with your mouse and select “Save Target As” with Internet Explorer or “Save Link As” with Netscape.

The January 2003 edition of the Medical Management Advisor, which Mark co-edited, contains an article he wrote on the many issues confronting attorneys and financial advisors in drafting proper buyout agreements. Right click here with your mouse and select “Save Target As” to get the article in .pdf format.

Standard of Value

Standards of value determine which set of rules and assumptions the valuator will employ in reaching the valuation conclusion.

Market”

This term refers to the universe of buyers and sellers. In medical practices, the buyers and sellers include physicians, hospitals, integrated delivery systems, health plans, larger physician group practices, and physician practice management companies (PPMs). To paraphrase (former Speaker of the House) Tip O’Neill, ‘all medicine is local’ and buyers and sellers tend to be constrained by geographical proximity.

Fair Market Value (Standard of Value)

This term refers to a value that would be reached between a hypothetical willing buyer and seller. It is generally appropriate where regulatory authorities such as the Internal Revenue Service, Inspector General or Health Care Finance Administration are concerned. It may be incorrect, for example, in a state proceeding involving minority shareholder rights.

“The willing buyer and the willing seller are hypothetical persons, rather than specific individuals or entities, and the characteristics of these hypothetical persons are not necessarily the same as the personal characteristics of the actual seller or a particular buyer.” He further stated that “Fair market value is determined as of the valuation date and no knowledge of unforeseeable future events which may have affected the value is given to the hypothetical persons.” (Tax Court Judge Laro, Pabst Brewing Company v. Commissioner, TCM 1996-506).

Strategic Value (Standard of Value)

Strategic value is contrasted with fair market value by being the value to a specific buyer of the acquisition target. The word “synergy” is sometimes used to describe those situations in which the target is worth more as part of the acquirer than by itself. There are a host of strategic considerations that a buyer might consider with respect to a particular target that would cause that buyer to pay more than fair market value.

Fair Value (Standard of Value)

A standard of value typically established by court precedent or statute, such as in a proceeding involving minority shareholder rights. A typical feature of fair value is that minority discounts (or discounts for lack of control) are not considered and the minority shareholder is entitled to a prorata share of the control value.

Going Concern (Premise of value)

Going concern is a premise of value, or assumption as to the use of the assets of the entity. For an ongoing enterprise, the premise is going concern, meaning that it will continue to operate in the ordinary course of business. If the entity will be shut down and the assets sold off, the premise is known as liquidation. The premise of value should be stated along with the standard of value in the engagement letter and valuation report.

Forecast of cashflow

Represents management’s assumptions as to its most likely course of action and the most likely outcome during the forecast period. Contrast with a projection, which is merely a series of “what-if” assumptions and results not constrained by the most likely rule.

‘Goodwill’ – Professional Vs Business/Practice

Excess earning power which attaches to the individual is commonly referred to as personal or professional goodwill.

Business Goodwill is a misnomer: Individual components of intangible value are identifiable, and “goodwill” defines that portion of excess earning power not attached to any other intangible or individual. (see /articles/Enterprise.html)

Discount & Capitalization Rate

A discount rate refers to the cost of obtaining equity capital for a business. The capitalization rate is defined as the discount rate, less the expected future growth in the net cash flows of the business. (This is a good examination or cross-examination point for an expert witness.)

Weighted Average Cost of Capital

The capital structure of a business consists of two components, equity and debt. The cost of equity is the discount rate, while the cost of debt is a borrowing rate. The weighted average cost of capital is determined by multiplying the percentage of the total capital representing equity times the discount rate and adding to it the result of multiplying the percentage of the total capital representing debt times the borrowing rate.

Discount for Lack of Marketability (DLOM)

“The lack of marketability discount, is designed to reflect the fact that there is no ready market for shares in a closely held corporation” (Estate of Andrews v Comm, 79 T.C. 938)

“When determining the value of unlisted stock by reference to listed stock, a discount from the listed price is typically warranted in order to reflect the unlisted stock’s lack of marketability.” (Mandelbaum v. Comm, TCM 1995-255

Minority Discount or (better) Discount for Lack of Control (DLOC)

 

The minority shareholder discount is designed to reflect the decreased value of shares that do not convey control of a closely held corporation (Estate of Andrews, supra). It is only appropriate where the valuation model produces a Control Value; if the model produces a minority value, such as would result when the Guideline Company Method is used, no minority discount should be taken.

Valuation Approaches vs. Methods

 

Approaches

  1. Asset-Based or Cost
  2. Market
  3. Guideline Company
  4. Income

Methods (examples)

Income Approach

  1. Discounted cash flow
  2. Capitalization of cashflows

Excess earnings (often considered a hybrid method as it can contain elements of the cost approach)

Rules of Thumb

A shorthand estimation device based upon (purported) experiences of buyers, sellers and valuators. Beware: “The plural of anecdote is not data.” (/articles/thumb1.html)

Expert

An individual who by training, education and experience in “scientific, technical or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact at issue” or assist legal counsel in planning a case. (quoting Federal Rule of Evidence 702)