CPA.net

Noncompetes

For those of you who have followed my writings and lectures, you are aware that valuation of noncompetes is one of my areas of interest and expertise. I continue to be confounded  by some of my colleagues who confuse the issue of whether Fair Market Value contemplates a willing seller who will sign a noncompete, as opposed to whether or not the noncompete has any value. They are two distinct but interrelated questions.

IF the hypothetical buyer expects the seller to sign a noncompete, then that noncompete must have value - otherwise, why would the buyer ask for it. If it has value, we should be able to value it. The value of that noncompete is part of the enterprise-level cashflows of the entity being sold.

In marital dissolution valuation, identifying the value of the assumed noncompete is important in many jurisdictions since that noncompete may not be a divisible asset. Similarly, personal goodwill may not be a divisible asset and I have identified a methodology for measuring that in conjunction with the noncompete. In states which have a "walk away" definition of fair market value - e.g., Florida after Held v Held - the value left to the buyer IF the seller was free to compete post-sale is what is divisible. Thus, a logical approach to determining that divisible value is to determine enterprise value THEN subtract the value of the noncompete/personal goodwill to arrive at a divisible value.

Fair market value may well contemplate a willing seller signing a noncompete, but that noncompete has value and it may be a substantial part of the value derived from enterprise-level cashflows.

Conversion Factor

As reported in Modern Healthcare's Daily Dose, the Medicare Part B Online and the AHLA Heath Lawyers' Weekly, among others, it appears that House and Senate Conferees have agreed upon legislation that would overturn the 5% cut in the conversion factor and substitute a 1.5% increase for 2007, perhaps effective July 1, 2007, for those practices that submit quality data.

Financial Valuation and Litigation Expert

I received a note from the Editor of FVLE that my article on replication cost in physician practice valuation would be delayed until the February/March Edition.

The Health Lawyer

My article Identifying Appropriate Business Valuation Approaches under Stark and the AKS with Reed Tinsley, CPA/CVA appears in the current issue of The Health Lawyer from the American Bar Association. As indicated in earlier posts, we believe this article contains an important analysis of the issues surrounding incorporating quantitative assumptions that conform with regulatory standards into valuation models. We also review the customary definitions of Fair Market Value and the modifications to those definitions contained in the Stark regulations and implied by the Anti-Kickback Statute. Finally, there is an analysis of the use of the Market Approach and why it has serious limitations in the regulated healthcare sector.

I will be speaking on these issue in April at the Health Care Compliance Association's Compliance Institute in Chicago.