Douglas A. Terry, CPA/ABV, JD, MBA

Transcription

1 Douglas A. Terry, CPA/ABV, JD, MBA 1

2 Fair Market Value Hypothetical willing buyer and seller Neither party under compulsion Both parties have relevant knowledge of facts Medical practice valuations As Opposed to Investment Value Value in hands of specific owner Market share, synergies, etc. In medical practice valuations, cannot pay for synergies or referrals 2

3 Income Approach Market Approach Asset Approach 3

4 The sum of the present value of all expected future economic returns (net cash flows), where those future returns are discounted to the present using their appropriate cost of capital. 4

5 Single-Period Capitalization Method PV = C 1 (r-g) Mature company with stable cash flows Steady growth 5

6 Multi-Period Discounted Future Benefits Model PV = C 1 + C 2 + C T 1+r (1+r) 2 (1+r) 3 (r-g) (1+r) n Terminal value once steady-state growth achieved 6

7 Net Cash Flow Available to Invested Capital Earnings Before Interest and Taxes (EBIT) - Pro-Forma Income Taxes + Non-Cash Expenses - Increase in Working Capital - Capital Expenditures = Net Cash Flow Available to Invested Capital 7

8 Discount Rates R e = r f + β (r m r f ) + SP + α where, R e = the required return on equity, R f = the proxy risk-free rate of return, R m = the market proxy required rate of return, r m r f = the expected equity risk premium over risk-free rate, β = the security s beta, SP = the company s size premium, α = the company s unique, non-diversifiable risk 8

9 Cost of Equity Build-Up Method Using Morningstar (Ibbotson) Data Risk-Free Rate +Equity Risk Premium +Company Size Premium +Industry Risk Premium +Company-Specific Risk Premium =Cost of Equity 9

10 Discounting Cash Flow to Invested Capital WACC = [r e * w e ] + [(r d (1-t)) * w d ] r e = the common equity discount rate, as determined using the build-up method w e = the proportion of the market value of common equity to the market value of total invested capital r d = the cost of interest-bearing debt w d = the proportion of the market value of interest-bearing debt to the market value of total invested capital t = the company s corporate income tax rate Weightings Controlling interest: Impose optimal capital structure Minority interest: Iterative method 10

11 Based on substitution principle Incorporates market s perception of risk and growth prospects Considered the most direct approach for establishing FMV Getting good data can be a challenge Public companies, private transaction databases Revenue, Seller s Discretionary Earnings 11

12 Adjust each asset and liability line item to reflect true market value; Subtract market value of total liabilities from the market value of total assets; Arrive at the market value of total owners equity. Great for holding companies; floor for operating companies 12

13 Income Approach and Public Company Market Approach Results in marketable indication of value Discount for lack of marketability necessary Based primarily on restricted stock studies Control indication usually determined by cash flow assumptions Compensation adjustments Debt/Equity structure Non-operating expenses/adjustments 13

14 No Ancillary Services Family Medical Practice, Inc. Historical Income Statement For the Year Ended December 31, As a % of Revenue Physician Collections $ 4,241,682 $ 4,368,932 $ 4,500, % 100.0% 100.0% Ancillary Income 0.0% 0.0% 0.0% Total Revenue 4,241,682 4,368,932 4,500, % 100.0% 100.0% Salaries and Benefits 848, , , % 20.0% 20.0% Supplies 424, , , % 10.0% 10.0% Purchased Services 339, , , % 8.0% 8.0% Building and Occupancy 254, , , % 6.0% 6.0% Automobile 63,625 65,534 67, % 1.5% 1.5% Depreciation 84,834 87,379 90, % 2.0% 2.0% Physician Compensation 2,224,762 2,291,505 2,360, % 52.5% 52.5% Total Expenses 4,239,561 4,366,748 4,497, % 100.0% 100.0% Earnings Before Interest and Taxes 2,121 2,184 2, % 0.0% 0.1% Less: Interest Expense (2,121) (2,184) (2,250) 0.1% 0.1% 0.1% Net Income $ $ $ 0.0% 0.0% 0.0% 14

15 No Ancillary Services Family Medical Practice, Inc. Historical Income Statement For the Year Ended December 31, Physician Collections $ 4,241,682 $ 4,368,932 $ 4,500,000 Median Compensation:Collections Ratio* 52.7% 52.7% 52.7% Expected Compensation 2,235,366 2,302,427 2,371,500 Actual Compensation 2,224,762 2,291,505 2,360,250 Difference $ (10,604) $ (10,922) $ (11,250) *MGMA Physician Compensation and Production Survey 2013 Report Based on 2012 Data Family Medicine 15

16 No Ancillary Services Family Medical Practice, Inc. Normalization Adjustments For the Year Ended December 31, Physician Collections $ 4,241,682 $ 4,368,932 $ 4,500,000 Ancillary Income Total Revenue 4,241,682 4,368,932 4,500,000 Salaries and Benefits 848, , ,000 Supplies 424, , ,000 Purchased Services 339, , ,000 Building and Occupancy 254, , ,000 Automobile 63,625 65,534 67,500 Automobile (63,625) (65,534) (67,500) Depreciation 84,834 87,379 90,000 Physician Compensation 2,224,762 2,291,505 2,360,250 Physician Compensation 10,604 10,922 11,250 Total Expenses 4,186,540 4,312,136 4,441,500 Earnings Before Interest and Taxes 55,142 56,796 58,500 Less: Interest Expense (2,121) (2,184) (2,250) Net Income $ 53,021 $ 54,612 $ 56,250 16

17 No Ancillary Services Family Medical Practice, Inc. Normalized Income Statement For the Year Ended December 31, As a % of Revenue Physician Collections $ 4,241,682 $ 4,368,932 $ 4,500, % 100.0% 100.0% Ancillary Income 0.0% 0.0% 0.0% Total Revenue 4,241,682 4,368,932 4,500, % 100.0% 100.0% Salaries and Benefits 848, , , % 20.0% 20.0% Supplies 424, , , % 10.0% 10.0% Purchased Services 339, , , % 8.0% 8.0% Building and Occupancy 254, , , % 6.0% 6.0% Automobile 0.0% 0.0% 0.0% Depreciation 84,834 87,379 90, % 2.0% 2.0% Physician Compensation 2,235,366 2,302,427 2,371, % 52.7% 52.7% Total Expenses 4,186,540 4,312,136 4,441, % 98.7% 98.7% Earnings Before Interest and Taxes 55,142 56,796 58, % 1.3% 1.3% Less: Interest Expense (2,121) (2,184) (2,250) 0.1% 0.1% 0.1% Net Income $ 53,021 $ 54,612 $ 56, % 1.3% 1.3% 17

18 No Ancillary Services Family Medical Practice, Inc. Projected Income For the Year Ended December 31, As a % of Revenue Physician Collections $ 4,635,000 $ 4,774,050 $ 4,917, % 100.0% 100.0% Growth Rate 3.0% 3.0% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ancillary Income 0.0% 0.0% 0.0% Growth Rate 0.0% 0.0% 0.0% Total Revenue 4,635,000 4,774,050 4,917, % 100.0% 100.0% Salaries and Benefits 927, , , % 20.0% 20.0% Supplies 463, , , % 10.0% 10.0% Purchased Services 370, , , % 8.0% 8.0% Building and Occupancy 278, , , % 6.0% 6.0% Automobile 0.0% 0.0% 0.0% Depreciation 92,700 95,481 98, % 2.0% 2.0% Physician Compensation 2,442,645 2,515,924 2,591, % 52.7% 52.7% Total Expenses 4,574,745 4,711,987 4,853, % 98.7% 98.7% Earnings Before Interest and Taxes $ 60,255 $ 62,063 $ 63, % 1.3% 1.3% 18

19 No Ancillary Services Family Medical Practice, Inc. Discounted Cash Flow Analysis For the Year Ended December 31, Terminal Value Earnings Before Interest and Taxes $ 60,255 $ 62,063 $ 63,925 Less: Pro Forma Income 29.0% (17,474) (17,998) (18,538) Net Operating Profit After Taxes 42,781 44,064 45,386 Plus: Depreciation 92,700 95,481 98,345 Less: Capital Expenditures (92,700) (95,481) (98,345) Less: Increase in Working Capital (13,500) (13,905) (14,322) Net Cash Flow 29,281 30,159 31, ,513 Present Value Factor Present Value of Cash Flows 26,144 24,043 22, ,047 Enterprise Value 325,345 Less: Debt (45,000) 100% Equity Value on a Controlling, Marketable Interest Basis 280,345 Less: Discount for Lack of 10.0% (28,035) 100% Equity Value on a Controlling, Non Marketable Interest Basis 252,311 (Rounded) $ 250,000 Discount Rate: 20 Year Treasury Yield 3.45% Long Term Equity Risk Premium 6.70% Industry Premium (SIC Code 80 Health Services) 0.12% Small Size Premium 6.00% Cost of Equity 16.03% Equity Weighting 70.00% Equity Component 11.22% Practice Borrowing Rate 5.00% After Tax Borrowing Rate 3.55% Debt Weighting 30.00% Debt Component 1.07% Weighted Average Cost of Capital (Rounded) 12.00% 19

20 Ancillary Services Family Medical Practice, Inc. Historical Income Statement For the Year Ended December 31, As a % of Revenue Physician Collections $ 4,241,682 $ 4,368,932 $ 4,500, % 91.8% 91.8% Radiology Income 94,260 97, , % 2.0% 2.0% Physical Therapy Income 141, , , % 3.1% 3.1% Home Health Income 94,260 97, , % 2.0% 2.0% Other Lab and Ancillary Income 47,130 48,544 50, % 1.0% 1.0% Total Revenue 4,618,720 4,757,282 4,900, % 100.0% 100.0% Salaries and Benefits 923, , , % 20.0% 20.0% Supplies 461, , , % 10.0% 10.0% Purchased Services 369, , , % 8.0% 8.0% Building and Occupancy 277, , , % 6.0% 6.0% Automobile 69,281 71,359 73, % 1.5% 1.5% Depreciation 92,374 95,146 98, % 2.0% 2.0% Physician Compensation 2,422,519 2,495,194 2,570, % 52.4% 52.5% Total Expenses 4,616,411 4,754,903 4,897, % 99.9% 100.0% Earnings Before Interest and Taxes 2,309 2,379 2, % 0.1% 0.1% Less: Interest Expense (2,309) (2,379) (2,450) 0.1% 0.1% 0.1% Net Income $ $ $ 0.0% 0.0% 0.0% 20

21 Ancillary Services Family Medical Practice, Inc. Physican Compensation Adjustment For the Year Ended December 31, Physician Collections $ 4,241,682 $ 4,368,932 $ 4,500,000 Median Compensation:Collections Ratio* 52.7% 52.7% 52.7% Expected Compensation 2,235,366 2,302,427 2,371,500 Actual Compensation 2,422,519 2,495,194 2,570,050 Difference $ 187,153 $ 192,767 $ 198,550 *MGMA Physician Compensation and Production Survey 2013 Report Based on 2012 Data Family Medicine 21

22 Ancillary Services Family Medical Practice, Inc. Normalization Adjustments For the Year Ended December 31, Physician Collections 4,241,682 4,368,932 4,500,000 Radiology Income 94,260 97, ,000 Physical Therapy Income 141, , ,000 Home Health Income 94,260 97, ,000 Other Lab and Ancillary Income 47,130 48,544 50,000 Total Revenue 4,618,720 4,757,282 4,900,000 Salaries and Benefits 923, , ,000 Supplies 461, , ,000 Purchased Services 369, , ,000 Building and Occupancy 277, , ,000 Automobile 69,281 71,359 73,500 Automobile (69,281) (71,359) (73,500) Depreciation 92,374 95,146 98,000 Physician Compensation 2,422,519 2,495,194 2,570,050 Physician Compensation (187,153) (192,767) (198,550) Total Expenses 4,359,977 4,490,777 4,625,500 Earnings Before Interest and Taxes 258, , ,500 Less: Interest Expense (2,309) (2,379) (2,450) Net Income $ 256,433 $ 264,126 $ 272,050 22

23 Ancillary Services Family Medical Practice, Inc. Normalized Income Statement For the Year Ended December 31, As a % of Revenue Physician Collections 4,241,682 4,368,932 4,500, % 91.8% 91.8% Radiology Income 94,260 97, , % 2.0% 2.0% Physical Therapy Income 141, , , % 3.1% 3.1% Home Health Income 94,260 97, , % 2.0% 2.0% Other Lab and Ancillary Income 47,130 48,544 50, % 1.0% 1.0% Total Revenue 4,618,720 4,757,282 4,900, % 100.0% 100.0% Salaries and Benefits 923, , , % 20.0% 20.0% Supplies 461, , , % 10.0% 10.0% Purchased Services 369, , , % 8.0% 8.0% Building and Occupancy 277, , , % 6.0% 6.0% Automobile 0.0% 0.0% 0.0% Depreciation 92,374 95,146 98, % 2.0% 2.0% Physician Compensation 2,235,366 2,302,427 2,371, % 48.4% 48.4% Total Expenses 4,359,977 4,490,777 4,625, % 94.4% 94.4% Earnings Before Interest and Taxes $ 258,743 $ 266,505 $ 274, % 5.6% 5.6% 23

24 Ancillary Services Family Medical Practice, Inc. Projected Income For the Year Ended December 31, As a % of Revenue Physician Collections 4,635,000 4,774,050 4,917, % 91.8% 91.8% Radiology Income 103, , , % 2.0% 2.0% Physical Therapy Income 154, , , % 3.1% 3.1% Home Health Income 103, , , % 2.0% 2.0% Other Lab and Ancillary Income 51,500 53,045 54, % 1.0% 1.0% Total Revenue 5,047,000 5,198,410 5,354, % 100.0% 100.0% Salaries and Benefits 1,009,400 1,039,682 1,070, % 20.0% 20.0% Supplies 504, , , % 10.0% 10.0% Purchased Services 403, , , % 8.0% 8.0% Building and Occupancy 302, , , % 6.0% 6.0% Automobile 0.0% 0.0% 0.0% Depreciation 100, , , % 2.0% 2.0% Physician Compensation 2,442,645 2,515,924 2,591, % 48.4% 48.4% Total Expenses 4,764,265 4,907,193 5,054, % 94.4% 94.4% Earnings Before Interest and Taxes $ 282,735 $ 291,217 $ 299, % 5.6% 5.6% 24

25 Ancillary Services Family Medical Practice, Inc. Discounted Cash Flow Analysis For the Year Ended December 31, Terminal Value Earnings Before Interest and Taxes 282, , ,954 Less: Pro Forma Income Taxes 29.0% (81,993) (84,453) (86,987) Net Operating Profit After Taxes 200, , ,967 Plus: Depreciation 100, , ,087 Less: Capital Expenditures (100,940) (103,968) (107,087) Less: Increase in Working Capital (14,700) (15,141) (15,595) Net Cash Flow 186, , ,372 2,258,811 Present Value Factor Present Value of Cash Flows 166, , ,485 1,607,777 Enterprise Value 2,067,132 Less: Debt (49,000) 100% Equity Value on a Controlling, Marketable Interest Basis 2,018,132 Less: Discount for Lack of 10.0% (201,813) 100% Equity Value on a Controlling, Non Marketable Interest Basis 1,816,319 (Rounded) $ 1,820,000 Discount Rate: 20 Year Treasury Yield 3.45% Long Term Equity Risk Premium 6.70% Industry Premium (SIC Code 80 Health Services) 0.12% Small Size Premium 6.00% Cost of Equity 16.03% Equity Weighting 70.00% Equity Component 11.22% Practice Borrowing Rate 5.00% After Tax Borrowing Rate 3.55% Debt Weighting 30.00% Debt Component 1.07% Weighted Average Cost of Capital (Rounded) 12.00% 25

26 Ancillary Services Family Medical Practice, Inc. Market Approach Private Comparable Transactions Date Description Sale Price Sales MVIC:Sales 3/6/2008 Medical Practice $300,000 $1,435, /17/2008 Medical Practice $14,038,000 $24,728, /11/2008 Single Physician Owned Clinic $1,375,564 $1,662, /1/2009 Family Practice $1,100,000 $2,513, /15/2009 Family Practice with Ancillary Services $1,500,000 $2,600, /29/2009 Internal Medicine Practice $21,245,310 $29,310, /14/2009 Medical Practice with Laboratory $4,700,000 $5,478, /15/2011 Ophthalmology $325,000 $1,166, /16/2011 Family Medical Practice $400,000 $1,634, /2/2012 Cosmetic Medical Center $499,000 $1,128, /19/2012 Medical Practice $259,215 $1,270, /11/2013 Medical Practice $1,300,000 $2,679, Average 0.43 Median Revenue 4,900,000 Multiple 0.44 Indicated Value (Rounded) 2,156,000 Less: Debt (49,000) Equity Value 2,107,000 Equity Value (Rounded) $ 2,110,000 Source: Pratt's Stats Database SIC Codes 8011 (Offices of Doctors), 8062 (General Medical and Surgical Hospitals), 8069 (Speciality Hospitals), 8071 (Medical Laboratories), and 8093 (Speciality Outpatient Facilities). Entities with revenues between $1 million and $50 million included and transactions occurring in 2008 and later. 26

27 Ancillary Services Family Medical Practice, Inc. Market Approach Public Guideline Companies Method (All Numbers Except Share Prices and Multiples in Millions) Company MVIC: Revenue MVIC: EBIT MVIC: EBITDA MVIC: Book Value Revenue Revenue Growth EBITDA EBITDA Growth HealthSouth Corporation , % % US Physical Therapy Inc % % HCA Holdings, Inc (4.9) 27, % 6, % Health Management Associates Inc , % 1, % Tenet Healthcare Corp , % 1, % Universal Health Services Inc , % 1, % AmSurg Corp % % Community Health Systems, Inc , % 1, % Lifepoint Hospitals Inc , % % Vanguard Health Systems Inc , % % Mednax, Inc , % % DaVita HealthCare Partners, Inc , % 1, % Hanger, Inc % % IPC Hospitalist Company % % Team Health Holdings, Inc % % Nordion Inc % % Average , % 1, % Median , % % Standard Deviation Coefficient of Variation 85% 24% 26% 104% Synthesis of Value: Revenue EBIT EBITDA 2012 Practice Indicated Multiple Indicated Enterprise Value Total Weighting 0% 50% 50% 100% Indicated Enterprise Value Indicated Enterprise Value 3,100,000 Less: Debt (49,000) 100% Equity Value on a Marketable Interest Basis 3,051,000 Less: Discount for Lack of 10% (305,100) 100% Equity Value on a Non Marketable Interest Basis 2,745, % Equity Value (Rounded) $ 2,750,000 27

28 Ancillary Services Family Medical Practice, Inc. Conclusion of Value Indicated Value Weighting Component Income Approach Discounted Cash Flow Analysis $ 1,820, % $ 1,638,000 Market Approach Private Transactions 2,110, % 211,000 Market Approach Public Companies 2,750, % Total 100% 1,849, % Equity Value on a Controlling, Non Marketable Interest Basis 1,849,000 Plus: Debt 49,000 Enterprise Value 1,898,000 Enterprise Value (Rounded) $ 1,900,000 28