427
Medical Practice as a New
Asset Class?
Valuing the Quintessential
Alternative Financial Investment
David Edward Marcinko
17
CONTENTS
Introduction ....................................................................................................................................429
Traditional Reasons for a Medical Practice Valuation ..............................................................429
Estate Planning ..........................................................................................................................429
Buy–Sell Agreements ................................................................................................................430
Physician Partnership Disputes ................................................................................................. 430
Divorce ...................................................................................................................................... 430
Understanding Valuation Denitions ............................................................................................. 431
What Medical Practice Assets Have Value? ................................................................................... 431
Dening the “Standard of Value” .............................................................................................. 433
Health-Care Regulations: What Doctors and Financial AdvisorsNeed to Know.......................... 433
Valuation Regulations That Impact Practice Value ...................................................................434
The Private Valuation Process ........................................................................................................ 434
IRS Revenue Ruling 59-60 ....................................................................................................... 434
Approaches to Medical Practice Value .......................................................................................... 435
Income Approach ...................................................................................................................... 436
Discounted Cash Flow (DCF) Method...................................................................................... 436
Key DCF Assumptions .............................................................................................................. 436
Determining the Required Rate of Return for DCFA ............................................................... 437
Capitalization of (Excess) Earnings Method............................................................................. 437
Net Income Statement Adjustments .......................................................................................... 438
Nonrecurring Items............................................................................................................... 438
Perquisites ............................................................................................................................ 438
Noncash Expenses ................................................................................................................ 438
Balance Sheet Adjustments ....................................................................................................... 438
Market Transaction Approach ................................................................................................... 439
Asset/Cost Approach ................................................................................................................. 439
Understanding Corporate Deals Structure ..................................................................................... 439
Stock Purchase versus Asset Purchase ......................................................................................440
Restrictive Covenant Value Is Goodwill ...................................................................................440
Buyer Mistakes (“Caveat Emptor”) ...............................................................................................440
Finding Qualied Valuation Professionals ..................................................................................... 441
How Much Money Is a Medical Practice Really Worth? ...............................................................442
Understanding Value .................................................................................................................442
428 Comprehensive Financial Planning Strategies for Doctors and Advisors
As we have seen in the earlier chapters, the investment industry and modern portfolio theory (MPT)
strive to make optimal “allocations” into different “asset classes,” according to some dened risk
tolerance level or efcient frontier. Equities, xed income, property, private equity, emerging mar-
kets, and so on are all “asset classes,” into which physician investors and mutual fund or portfolio
managers will make an allocation of their total funds under the management. It is quite proper for
them to do this as they seek to balance the risk and potential returns for their own; ME, Inc., or other
clients’ money. By creating a “new” asset class, this concept opens the door to signicant capital
ows, advisory, and management fees. Hence, the unrelenting innovation of Wall Street, and its
commission-driven and fee-seeking mavens, is unending.
This concept may be illustrated using Social Security as an example. So, Wall Street opines, if
youre not counting on Social Security benets as a part of an overall asset allocation strategy, you
may be missing out on bigger gains in a retirement portfolio. Those of this ilk say that retirement
investors should consider the value of their Social Security as a portion of their xed-income invest-
ments. Others believe it may be too risky.
Generally, adopting this strategy would mean shifting a big portion of investible assets out of bonds
and into stocks and into the hands of money managers, stock brokers, and wealth managers for a fee,
of course. This is akin to those nancial advisors who rightly or wrongly goaded clients to not pay
off a home mortgage and instead reposition the free cash ow into a rising, and then falling, market.
Of course, there are detractors, as well as proponents of this emerging nancial planning philosophy.
For example, Jack Bogle, founder of the Vanguard Group, often cites his penchant for basing
ones asset allocation on age. (If youre 40 years old, you have 40% of your investments in xed
income and 60% in equities. By the time youre 60, youve got 60% in xed income, 40% in
equities).
So, let’s consider Social Security, citing a physician with $300,000 in an investment portfolio,
and capitalizing the stream of future payments. So, if the $300,000 is all in equity funds, even
equity-index funds, and $300,000 is in Social Security, you are already at 50/50 xed income ver-
sus equities. The next step is a conversation as this is the nexus of where Social Security meets risk
How to Maximize Medical Practice Value ................................................................................442
Practice Revenue ..................................................................................................................442
Review Practice Costs ..........................................................................................................442
Physician Compensation Inverse Relationship to Value ......................................................443
Completing the Transaction ...........................................................................................................443
Working Capital: In or Out........................................................................................................443
Stock versus Asset Transaction ................................................................................................. 443
Common Stock Premium .......................................................................................................... 443
Physician Compensation ...........................................................................................................443
Understanding Private Deal Structures ..........................................................................................443
Seller Financing ........................................................................................................................443
Down Payment ..........................................................................................................................444
Seller Involvement ....................................................................................................................444
Location.....................................................................................................................................444
Prot Margin .............................................................................................................................444
Taxation .....................................................................................................................................444
An Alternate Asset Class Surrogate? .............................................................................................444
Assessment .....................................................................................................................................445
Conclusion .....................................................................................................................................445
Collaborate ..................................................................................................................................... 445
Acknowledgments ..........................................................................................................................445
Further Reading .............................................................................................................................445

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