Valuation 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.
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.
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-edits,
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" with Internet Explorer or
"Save Link As" with Netscape 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
http://www.cpa.net/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
- Asset-Based or Cost
- Market
- Guideline Company
- Income
Methods (examples)
Income Approach
- Discounted cash flow
- 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." (http://www.cpa.net/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)
