Valuations Part Four – Market Value Defined
Introducing part 4 of our series on valuations: an introduction to Market Value.
Market Value means the price at which a center would transfer for cash or its equivalent under prevailing market conditions in an open and competitive market. The center is exposed for sale to the open market with a reasonable time for the seller to find a purchaser and both the seller and purchaser seek to maximize their gains and neither is in a position to take advantage of the exigencies of the other (Private Capital Markets/Robert T. Slee).
As you can most likely gather from this definition, there are a lot of factors and considerations that go into Market Value (MV).
MV is, “similar to the highest and best use value, and you obtain it by conducting a broad auction for the business or center,” according to Blayne Rush, President of Ambulatory Alliances, LLC.
Many might hear or see this term and immediately correlate it with Fair Market Value (FMV) or the market approach. However, they are different concepts.
The distinction between MV and FMV lies in the process of arriving at one or the other, in Rush’s opinion.
“When I think about these terms, I think more about a process than the direct definition,” he said. “I consider Market Value similar to an auction approach where you go to the entire market, think general market and negotiate with all the participants while FMV is in practice an appraisal process or an opinion of value.”
Although different, the two types of valuation are related. Jason Ruchaber of Root Valuation in the Greater Denver area sees the relation in the Stark Law definition of FMV.
“’Market value’ is not a Standard of Value defined in the appraisal literature, so it is not an appraisal term per se, but it is used generically to refer the range of prices likely to be paid in a given ‘market,’” he said. “The ‘General Market Value’ appears in the Stark definition of FMV, and then the language goes on to explain what they mean by general market value. In comparing the traditional definition of FMV to the Stark definition, the most obvious similarities are that both require well informed buyers and sellers, and both require arms length/bona fide bargaining between the parties.”
Ruchaber continued on to explain that the terms which do not overlap in the definition are open to interpretation depending on the context.
Rush notes that the way in which typical FMV is conducted is actually contrary to the Stark definition, “in that it is typically conducted before all the terms of the transaction have been negotiated and typically to establish the price instead of to confirm that the price and all the terms conform with the FMV standards.”
Taking a closer look at what the Stark Law coupled with the relevant case law, it would seem that the FMV process is supposed to be more along the lines of a “Fairness Opinion.”
“Fairness opinions in practice are conducted after the price has been negotiated as well as all of the terms are memorialized in writing,” Rush said. “The intent of the FMV definition is not to set the price paid for a healthcare business, it is to ensure or support that something of value of was not given for a referral, but that is how it is sometimes used by hospital buyers and some professional valuators.”
The meaning of value itself, as we’ve seen thus far, is a tricky thing to navigate. According to Rush, the worth or value of a center at any given moment hinges on the purpose of the valuation being done.
“Valuators and buyers or investors have many methods for determining the value of your center: Comparable Sales Approach, IRR (International Rate of Return), Income Approach, Asset Value Approach etc.,” he said. “The truth is your center is worth as much as the open and unrestricted general market is willing to pay for it. In some instances we must make sure that this is not more than the FMV and sometimes it does not matter if it is more than FMV.”
Ruchaber points out that a center can possibly sell at higher than FMV, depending on the legality of the matter.
“Remember, the laws dictate what standard of value we use in any given assignment,” he explained. “The IRS has a definition of fair market value, the Stark law has a definition of FMV, there are similar contextual situation (divorce, shareholder disputes, bankruptcy, etc.) where a standard of value may be required.”
Rush notes that so long as no relationships exist in the past nor will they exist in the future between the parties involved in the sale where one is in a position to make healthcare referrals to the other, then the possibility of selling a center above FMV exists.
The fact that a market can be swayed is the main reason why experts advocate the preparation of a center for sale as best as can be done prior to proactively marketing it to the universe of buyers.
“If you can influence the open and unrestricted general market to move up, or if the competition forces them to move their offer price and terms up, then you just increased the economic value of your center and FMV,” Rush said. “This is what the Stark definition of FMV requires us to do.”
Rush went on to stress the validity of this statement as can be found in various court cases.
“This is supported by the McLaren decision in that the court stressed as the dominating point; the arm’s-length negotiations between the parties,” he said. “While other courts have stated that merely negotiations at arm’s-length is not enough, they have stated that it in addition to a well documented process that you went to the entire market, negotiated with all of them and that you arrived at the value without paying for what is prohibited by law.”
Part five of our valuations series will see Market Value in action through bargaining and the various sources of data for arriving at the value of a center.
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