Certainly, most attorneys will be familiar with the basic questions for an expert. However, those who use valuation experts rarely or are involved with a case requiring one for the first time, may be unaware of the rapid development of valuation as a credentialed specialty. The explosive growth of litigation and small business coupled with the pathetic performance of real estate valuators in the late 1980’s has fueled the demand for valuation expertise.

Valuation expertise, like most professional disciplines, is obtained through training and experience. In addition, the valuation community has implemented the examination process seen in the traditional professions like law, medicine and accounting.

The AICPA, ASA, IBA and NACVA all offer comprehensive training programs in business valuation. Legal counsel should be aware that these organizations also offer memberships that do not require holding of the license or designation. This is a good exam or cross-examination point.

Only Certified Public Accountants are eligible to hold the ABV designation. The applicant must demonstrate experience in business valuation prior to sitting for a comprehensive and rigorous eight-hour examination. The AICPA offers a variety of business valuation courses, but does not have course requirements for taking the exam. As is the case with the CPA license, the designation ABV requires a minimum number of continuing education hours be taken every two years.

In the case of the ASA, certain course offerings in addition to an exam and submission of reports are required as part of the process of obtaining the Accredited Senior Appraiser designation. The ASA applicant must also have five years of fulltime-equivalent valuation experience. Ongoing continuing professional education is necessary to maintain the designation. As a stand-alone valuation designation, this is the most difficult to obtain, in part because it carries no undergraduate degree or other professional licensure requirement, and therefore has a much greater course requirement prior to qualifying to take the exam. The Society also offers other designations.

The IBA requires candidates have a four-year college degree, pass a four-hour examination, and submit two valuation reports for review and approval. Ongoing continuing professional education is necessary to maintain the designation. Applicants who have passed the ABV, ASA or CVA examination may waive the IBA exam requirement. The Institute also offers other designations.

Only Certified Public Accountants are eligible to hold the CVA designation, although the organization is not affiliated with the AICPA. Certain course offerings in addition to a ‘take-home’ exam and written case study valuation report are required as part of the process of obtaining the designation. Ongoing continuing professional education is necessary to maintain the designation.

As readers of the Medical Practice Valuation Guidebook will no doubt conclude, medical practices are a highly specialized area of practice. The unique revenue environment where the price of services is set by third parties, coupled with the unique regulatory environment, precludes generic valuators who may do very well with small manufacturers or other types of service businesses.

Clearly, experience plays a critical role in the quality of an expert’s valuation opinion. In medicine, as noted in the next bullet, there are numerous specialties, each of which may have particular nuances that the valuator will need to identify and analyze. The greater the volume of prior cases, the more likely the valuator will know how to zero in on the nuances.

The majority of valuation engagements tend to fall into the categories where the majority of physicians practice: family medicine, internal medicine, pediatrics followed by cardiology, orthopedics, and general surgery. In contrast, counsel seeking a valuator with prior experience in a liver transplant practice is unlikely to find one.

As in many areas of professional practice, peer review is critical in valuation. Owing to the decision in Kumho Tire (Kumho Tire Co., Ltd. V. Carmichael, 119 S. Ct. 1167 (1999)) and its progeny, peer review has gained a preeminent role for experts. Development and presentation of professional education programs may not only indicate the expert’s ability to understand concepts, but also to communicate them.

Reports take many forms, and even written reports may differ substantially in their content. Clearly, there is a significant cost factor in the detail contained in a written report. In a valuation for purposes of a transaction subject to regulatory review, a comprehensive written report is generally a must. Certainly, any valuation headed for the Tax Court should be comprehensive. Legal counsel should be certain to discuss the specific requirements for their engagement with the valuator in advance of the undertaking of the engagement.

There are a number of basic requirements for preparing a proper report, must clearly delineated in the Business Valuation Standards developed by the ASA.

As noted elsewhere herein, the valuation engagement must be described with a great degree of detail. There is a significant difference between fair market value on a going concern basis, and liquidation value. The latter contemplates a cessation of business, but is still consistent with fair market value – the premise of value is different.

There is also a consequential difference between an asset valuation and a stock valuation. Asset valuations are customarily used for valuing a 100% control interest in a practice that will be sold to a third party, where the third party will not acquire stock. A stock valuation would be appropriate, for example, when valuing an ownership interest in an incorporated medical practice for divorce purposes. A notable difference between an asset and a stock valuation is the basis step-up fore tax purposes that the buyer obtains in both tangible and intangible assets. This has tax benefits that the valuator must consider in the valuation model. If the entity is structured as a Limited Liability Company or partnership, still other considerations may be necessary.

The date of the valuation is critical and legal counsel should be certain to reach a clear understanding of this with the consultant. In domestic relations or damages proceedings, the choice of a date can have a considerable impact on the end result.

There is much flexibility in the content and the order of its presentation. The basic goal of all of the information included in the report is to reinforce the ultimate valuation conclusion. Both the information as well as the valuator’s presentation of it is important. The most significant difference between a generic business valuation and that for a medical practice is in the analysis of revenue, which must look at both CPT codes and the major insurers the practice contracts with.

Unless a site visit has been specifically excluded from the engagement (which exclusion should be noted in the report), a general physical description of the office is commonplace.

Many times this section of a report is seen as boilerplate and ignored. Although it may, in fact, be boilerplate, it contains critical contemporaneous documentation of the market as of the valuation date. In regulatory proceedings involving the IRS or OIG, contemporaneous documentation is crucial.

This segment of the report should look at overall economic conditions and how they affect healthcare. The status of changes in the Medicare program should be addressed since it and Medicaid account for more than $300 billion of healthcare spending.

A discussion of the regulatory environment is a must for any medical practice valuation that is subject to government review. The reason for this is simple: legal counsel wants the regulator to know that the valuation expert was cognizant of the relevant provisions and considered them in the report. Many common valuation practices may run afoul of the Fraud and Abuse or Stark laws, such as the seller receiving value for referrals made to the buyer. In addition, fair market value is generally the only valuation standard accepted for regulatory purposes.

Medicine is so highly specialized that it is not possible to value a practice without knowing precisely what it is that the physician does. For example, a valuator needs to know if a cardiologist is invasive (interventional) or noninvasive. An invasive cardiologist performs such procedures as angioplasty and cardiac catheterization and can be expected to make substantially more than a noninvasive cardiologist. Using the statistical earnings of a cardiologist to determine the excess earnings of an invasive cardiologist would result in an inaccurate conclusion.

The Key Tips for Attorneys in Chapter 5 describe each of these areas in detail, except for lack of control and lack of marketability discounts which are described in Chapter 6.

The results of each method used should be presented. If there are wide gaps in the results, legal counsel should suspect a problem. For example, if one method has a value of $10,000 and another method a value of $200,000, the application of both is probably wrong. If this seems obvious, it is, in fact, a common mistake made by incompetent valuators.

There are different opinions as to the reconciliation of different (but "in the same ballpark") results. Some valuators will assign weights to each and base the ultimate value on the weighted average of the methods. Others will select a value form within the range determined by the methods. Still others will provide a range of values.

Range of values may be appropriate in certain regulatory circumstances, such as determining the fair market compensation for a physician being employed by an exempt hospital.

This is a critical and basic part of any properly prepared valuation report. Valuation standards dictate that these conditions be enumerated. The lack of such conditions should be regarded as making a report substandard.