Co-authored by  Jerry M. Chang, C.F.A., Ankura Consulting Group, LLC, Atlanta, Georgia


The transaction marketplace for physician practices is incredibly active for physician owners, transaction lawyers, financing sources, consultants, tax advisors, and many other stakeholders. Whether it's health systems and hospitals acquiring or divesting primary care and specialty practices or private investment firms consolidating practices through large practice management services structures, the medical practice transaction ecosystem is very dynamic.

Varying business reasons motivate each market participant's activity, but it adds to a frenzied environment in the aggregate. Health systems are either trying to create integrated care models, address weakness in hospital emergency department and inpatient businesses, control the "gatekeepers," and/or exit practice acquisitions that are underperforming expectations. Private investment firms are finding significant opportunities in a sector of the health care industry that is still quite fragmented with room for consolidation and efficiencies. Physician owners who weathered the pandemic-related operational issues are finding a "sellers" market with an opportunity to exit the management headaches of practice management.

Overall, this increased activity brings with it several major deal-related issues. The "seller's" market and the effects of the pandemic are bringing into focus questions around the most appropriate way to value practices and structure transactions. The pandemic has increased uncertainty around getting a clear picture of a practice's current and future financial performance. Elevated financial performance uncertainty has led parties to enter into transaction structures and terms to bridge differences and mitigate perceived risk. At least one of those ways may carry significant legal risk under the federal Anti-Kickback Statute, 42 USC 1320a-7b(b) (AKS).


The science and art of valuation related to physician practice business and asset transactions has rarely been tested more than during the past two and a half years. Those who approached valuation in the past with a simplistic, mechanical mindset were quickly reminded about the importance of understanding the nuances of valuation principles when the "normal" environment drastically changes.

In most industries, the consequences of disregarding these nuances can lead to material overpayment or underpayment for a business and its related assets. However, in the heavily regulated healthcare industry, a valuation miss can have more than economic consequences—it can also result in increased regulatory and tax compliance risk.

It is impractical for this article to cover all valuation and transaction structure issues that emerged more prominently during the pandemic. However, below are two key valuation considerations that may not have had much focus before the pandemic's disruption of the marketplace.

Is the Premise of Value Appropriate?

In the healthcare industry, most understand and focus on the importance of fair market value as the standard of value for regulatory compliance. A concept that garners less attention is the premise of value. Various premises of value may be considered under the fair market value standard. In general, four premises of value are typically considered: 1

Value-in-Continued-Use, as Part of a Going Concern
Value-in-continued-use, as a mass assemblage of income-producing assets, and as a going concern business enterprise.

Value-in-Place, as Part of a Mass Assemblage of Assets
Value-in-place, as part of a mass assemblage of assets, but not in current use in the production of income, and not as a going-concern business enterprise.

Value-in-Exchange, in an Orderly Disposition
Value-in-exchange, on a piecemeal basis (not part of a mass assemblage of assets), as part of an orderly disposition. This premise contemplates that all the business enterprise's assets will be sold individually and that they will enjoy normal exposure to their appropriate secondary market.

Value-in-Exchange, in a Forced Liquidation
Value-in-exchange, on a piecemeal basis (not part of a mass assemblage of assets), as part of a forced liquidation. This premise contemplates that all the business enterprise assets will be sold individually and that they will experience less than normal exposure to their appropriate secondary market.

One could conceivably have four different fair market value conclusions depending on the selected premise of value. The selected premise of value related to a fair market valuation analysis can have material implications on identifying assets to be valued, methodology, and key assumptions utilized. Choosing the appropriate premise of value is critical considering the impact of the pandemic.

The pandemic caused many healthcare practices to become distressed, especially smaller practices. A question for a potential buyer to consider: is the medical practice a going concern business on a standalone basis, or should a different premise of value be considered, such as value-in-place or liquidation value? The answer has implications for the methodology and critical assumptions utilized.

For example, if a value-in-place or liquidation premise is assumed, the valuation of certain intangible assets may not be appropriate (e.g., assembled workforce, goodwill). In a situation where the provider business will likely close, a truncated projection reflecting a wind-down may be necessary to perform a Discounted Cash Flow method. A probability-weighted scenario analysis assuming different premises of value could be an option in estimating fair market value.

Impact on Selected Valuation Approaches and Methodology

The three approaches to business valuation (i.e., asset, income, and market) are predicated on future earnings streams generated from a business or the sale of related assets. Under the asset approach, the business value is the price at which its tangible and intangible operating assets could be sold. Under the income approach, the business value is the present value of the expected future earnings generated from using these assets. Under the market approach, the stock prices of publicly traded companies or the price that an acquirer pays for a business or asset are based upon the investor's expectations of future earnings or proceeds, respectively.

Because valuation is forward-looking, historical results and trends are only helpful as a potential indicator of future earnings. Due to the impacts of the pandemic, future earnings of most healthcare businesses will likely be drastically different than historical pre-pandemic earnings. Therefore, valuation multiples based on historical results will not be appropriate in most cases.

Market Approach

The two primary methods under the market approach are the Comparable Transactions (CT) Method and the Guideline Public Company (GPC) Method. Under the CT Method, valuation multiples from historical completed transactions involving comparable companies are applied to the subject company. For the GPC Method, valuation multiples for publicly traded comparable companies are calculated using the public company stock prices. For both methods, comparability of the guideline transactions and companies and confidence in both the numerator (price) and denominator (financial metric) are essential in deriving valuation multiples. Each of these variables will be more uncertain in a pandemic-affected environment, and certain earnings adjustments must be made.

Because the local market and demographics highly influence healthcare, the market approach in healthcare valuation is often utilized as a reasonableness check to the income approach. Even within a local market, practices with different payer mixes can have widely different financial and operational characteristics. Given the pandemic's impact, relying upon a market approach is even more challenging due to the scarcity of transactions and the increased need to make comparability adjustments to the healthcare provider business or asset being valued.

For the CT Method, this challenge of comparability becomes heightened during a sharp economic downturn with wide-ranging and varied local market impact. Even if transactions for comparable companies or assets can be located, these transactions occurred in the past during very different economic times, and acquiring entities most likely had very different growth expectations compared to the current market.

For the GPC Method, the valuation multiples are based on the public company stock prices, which should incorporate the economic downturn and resulting investor expectations. However, current stock prices may be artificially depressed and not representative of the long-term prospects for comparable companies.

Additionally, the buyer should emphasize the projected revenues and earnings of the public companies and consider calculating valuation multiples based upon those forward-looking metrics rather than the last twelve-month metrics. These projected revenues and earnings would incorporate the company's expectations, considering the pandemic.

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1. Pratt SP, Reilly RF, Schweihs RP. Valuing Small Businesses and Professional Practices, 3rd Edition. New York City, New York: McGraw-Hill Education, 1998, 46-47.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.