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The Purpose of a Professional Appraisal

The Hekman Group, provides appraisals of medical practices for various purposes:

• Physicians preparing to sell their practice can use an appraisal to determine a fair asking price.

• Potential buyers can use the appraisal to document the components of value and to obtain an independent opinion about the fair market value of the practice.

• Physicians with significant holdings can use an appraisal for estate planning and tax purposes.

• An appraisal can yield insights about the components of value, leading to a strategic planning process for improving the profitability and value of the practice.

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Our Approach to Finding the Fair Market Value of a Medical Practice

Appraising the value of a medical practice is both a science and an art. Our objective is to find the "fair market value" which is defined in Revenue Ruling 59-60 as follows in paraphrased form:

Fair market value is the price at which the property would change hands between a willing buyer and a willing seller when neither is under compulsion to act, and when both parties have reasonable knowledge of the relevant facts.

Finding the fair market value takes research and insight about the market position of the practice, its historical and projected profitability, and the compatibility between the practice's principals and its potential buyers.

Three basic approaches are used in reaching a conclusion about the fair market value. We develop an opinion about the net present value of future revenue streams to the buyer by looking at the practice's historical and projected income stream, the value of underlying assets, and the value of the practice relative to transactions of similar practices in the market. These three approaches are fundamental in the appraisal disciplines, and are adapted for medical practices through our unique combination of techniques.

Our research and insight is based upon more than twelve years of medical management and consulting experience, concentrating on appraisals and strategic planning services for medical practices nationwide. Our first book entitled Buying, Selling and Merging a Medical Practice (McGraw-Hill/Irwin, 1996) has sold thousands of copies and has helped physicians and healthcare executives make wise integration decisions.

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The Appraisal Process

The appraisal begins by reaching an agreement about the scope and purpose of the assignment. The appraisal may include a valuation of some or all of the following assets and liabilities:

• Medical and office equipment

• Accounts receivable

• Cash, prepaid expenses and securities

• Notes payable

• Goodwill value

A list of data requested for examination is enclosed. When the data has been assembled, a site visit is scheduled to gather and clarify the data, interview selected physicians and staff, and inventory the medical and office equipment.

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Measuring Goodwill

The art of determining the goodwill is based upon the principles of valuing closely held businesses, the Uniform Standards of Professional Appraisal Practice (USPAP), and the ethical standards for professional appraisal services as developed by the American Society of Appraisers.

We may apply several methods within the three broad approaches to yield multiple perspectives about the fair market value of the goodwill or intangible value of the practice. The results of each approach are then reconciled, through our professional judgment, to arrive at a single conclusion of the fair market value of the business.   

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The Cost of Professional Appraisal Services

The appraisal process requires a high level of professional judgment, which has come as the result of more than twenty years of healthcare executive experience, graduate study and professional accreditation. The professional fees are comparable to those of a mid-career attorney or accountant who specializes in a complex component in his field. Expenses in addition to professional fees may include travel costs, lodging, meals and other services incurred as a direct result of the assignment. The time involved varies according to the size and complexity of the assignment, but typically involves from three days for a solo practice to ten days for a multi-specialty group of ten to fifteen physicians.

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The Hekman Group

The principal appraiser is Kenneth M. Hekman, President of The Hekman Group. Mr. Hekman has an MBA, and over twenty-28 years in healthcare administration and consulting. He has personally conducted more than 200 reviews, consultations and appraisals for medical practices, and has served as an advisor to hundreds of physicians and healthcare executives. Mr. Hekman is a Fellow in the American College of Medical Practice Executives, and a frequent speaker at national and regional healthcare conferences.

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Data Requirements for Medical Practice Appraisals

The Hekman Group, will request the assembly of the following data to complete a medical practice appraisal, to be gathered at the time of the site visit:

• Financial statements compiled by the practice or its CPA firm for each of the last five fiscal years, plus the most current year-to-date statement

• Physicians' W-2 statements for each of the past five fiscal years

• Charges, payments and adjustments by physician for the current fiscal year

• The most recent accounts receivable by age and payer type

• The current fee schedule by CPT code

• A list of all employees by name, position, weekly scheduled hours, and wage

• The depreciation schedule for all owned equipment

The appraisers may also gather or review the following additional information at the time of the site visit:

• Office visit volumes based on reviews of the appointment schedules for recent months

• Written personnel policies

• Written credit and collection policies

• Leases on facilities and equipment

• Documentation of all debts of the practice

• Managed care participation contracts

• Explanations of benefits from major payers  

• Any other material that seems pertinent to the determination of the value of the practice

Contents of the Appraisal Report

1. The scope, date, standard of value, and purpose of the appraisal, with limiting conditions
   

2. Description of the practice relative to its market
   

3. Multiple valuation approaches, fully documented
   

4. Reconciliation of valuation conclusions to yield a single opinion of value
   

5. Certification that the appraisal meets the Uniform Standards of Professional Appraisal Practice
   

6. Supporting data in appendices

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