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And on a Lighter Note...

My colleague Kathie Wilson and I are working on an important new paper dealing with the interplay of reasonable compensation and intangible and goodwill value where a medical practice has revenue and profit from the Technical Component of Ancillaries. There are a myriad of reasons why this is important, including differentiating personal and enterprise goodwill in marital dissolution, determining reasonable compensation from MGMA data, and quantifying reasonable compensation when based upon work RVUs. We plan to include a checklist of items to consider as well as common examples including neurology and cardiology practices, the latter being of considerable import in the current wave of physician practice acquisitions.

I am also developing an equally important paper with another colleague on difficulties in, and solutions to, forecasting cashflow and assessing risk (discount rate) in healthcare industry valuation. More on this in a later post.

AHLA Tax & Finance Practice Group Member Briefing

My article Converting Physician Practices to Tax-Exempt Status: Is There an Upside to the Downturn? was published earlier this week as a Member Briefing by the American Health Lawyers Association. I would like to thank the editors, who included Travis Blaisdell at Mintz Levin, for their efforts in translating my submission into a form appropriate for the AHLA audience.  After my Journal of Accountancy article and ABA Health Lawyer article with Reed Tinsley, this is the third most edited article I have had published. The article contains some observations that are particularly important in the current environment.  Among these are the

1. Import in an appraisal of considering the tax impact of a liquidation when a taxable practice converts to exempt status

2. Continuing importance of the DCF method in determining whether and to what extent a practice has Intangible Value. I continue to believe that absent extraordinary circumstances, the Cost Approach should not supplant the Income Approach as the appropriate reference point in Healthcare Valuation.

3. Valuing the Transaction reflected in the transaction documents as required by the Derby case discussed elsewhere in this BLOG

4. Considering local law as to the enforceability of noncompete and similar provisions

5. Considering limitations on obtaining both debt and equity capital in the current environment on the discount rate and/or the consideration of marketability.

See this earlier Post: http://cpanet.typepad.com/cpanet/2009/03/exempt-organization-cpe-text.html

Health Lawyers Weekly

My article with Greg Anderson of Horne on WRVU Conversion Factors and the Fair Market Value of Physician compensation appeared in the November 15, 2008 edition of Health Lawyers Weekly from the AHLA. You can download it here.

Download HLW_article_Anderson_Dietrich.pdf

Derby et al v. Commissioner

My article on the above case, What Goes Around Comes Around, is in the current (Fall) edition of the AICPA's CPA Expert. I described it in a post to the BLOG back in May.  http://cpanet.typepad.com/cpanet/2008/05/index.html

You can download it at the link below.

Download fall_expert_what_goes_around_comes_around.pdf

Derby et al v. Commissioner

 

The Tax Court Case Derby et al v. Commissioner is important for a variety of reasons, not the least of which is its instructive value as today’s consolidation in the healthcare industry mirrors that in the early and mid-1990s when the Derby case originated.  Key factors in the case include those which this author has repeatedly cited in numerous articles over the last 10 years in CPA Expert, the Journal of Accountancy and elsewhere.

1. The use of expected post-transaction physician compensation in the discounted cashflow model based on the transaction documents rather than use of some arbitrary compensation figure, such as the median for a given physician specialty.
2. Allocating Enterprise or Invested Capital Value among Working Capital, Fixed Assets and Intangible Assets.
3. Carefully studying transaction documents to discern the character and extent of any intangibles being transferred or not being transferred.
4. The critical import of allocating between personal/professional goodwill and enterprise goodwill when valuing a medical practice for acquisition by a hospital.
5. The importance of any noncompete agreement in determining the value of the medical practice.
6. The need for “donative intent” when claiming a deduction for the value of a medical practice or other enterprise allegedly donated to a tax-exempt entity.
7. The extent of relevance of the Friendly Hills private letter ruling and the 1994 Exempt Organizations Continuing Professional Education Technical Instruction Program manuals.

I plan to submit an article on this case later this year but will update my BLOG periodically with additional thoughts.  For anyone valuing medical practices who hasn't read the 1994 Exempt Organizations Continuing Professional Education Technical Instruction Program manual, the link is posted elsewvere on the BLOG.

Enterprise and Personal Goodwill

In preparing for my recent course on the topic of this post, I came across a Technical Advice Memorandum from the IRS - 200244009 - dealing with a Physician Practice Management Company Transaction that cited Martin Ice Cream as the basis for part of the decision - which was highly favorable to the taxpayer. Well worth the read if you happen to be structuring such a transaction, or in any event if you have an interest in the area.

In connection with an upcoming piece (TBA)  I have also been giving some thought to the implications of the 8th Circuit's decision in Exacto Spring on reasonable compensation under an independent investor test. At least for medical practices, service businesses in general and many small businesses, reasonable compensation is the key factor in determining the value of the business. The difference between personal and enterprise goodwill should be a key factor in reasonable compensation; it is also a key factor (Martin Ice Cream and Norwalk) in allocating sale proceeds. An Exacto Spring reasonable comp analysis should also consider who owns the underlying goodwill - the corporation or the key employee.

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.