Tangible and Intangible Assets in the Valuation of a Healthcare Business
The assets of a company are key components during the valuation of a healthcare business in a transaction. It is important for potential sellers to understand that there are differences between the two main assets, tangible and intangible. The Ambulatory M&A Advisor explains the key differences between the two types of assets, how they are valued to potential buyers, and which types of assets are considered more important than others.
Curtis Bernstein, principal of Pinnacle Healthcare Consulting says that in most valuations the lowest value of any business is the value of tangible assets.
“Those are going to be things that can be held in your hand. These assets include cash, inventory, and fixed assets. Intangible assets are pretty much anything that cannot be held in your hand. These may include brand name, workforce in place, and goodwill,” Bernstein says.
Elliott Jeter, Managing Director for VMG Health goes into further detail on the differences between the two by explaining that allocating total value between tangible and intangible assets is a step-wise process. According to Jeter, the job of the appraiser is to first, understand the business value itself. Step two, is to allocate if needed by the client, the total value of both tangible and intangible assets, he says.
“Tangible assets include furniture, equipment, accounts receivable and other working capital components. Intangible can be a wide variety of things like non-compete agreements, good will, favorable leases, trade name and things like that. Intangible assets aren’t necessarily inherent in every valuation, but they have to be supported by the facts and circumstances. Patient charts would be considered a quasi-intangible asset. Since you can touch it, it is strictly a tangible asset, but it is treated in this world as intangible,” Jeter says.
Vanita Spaulding, Managing Director with Cogent Valuation adds that the valuation of assets can also depend on whether the business is more like an urgent care where people come in one time, or if it is more like a pain practice that operates on a more consistent patient base. Spaulding says that healthcare businesses like pain practices are different in value because they generally have developed more intangible assets than the average urgent care clinic.
“A pain practice is different. People come on a regular basis, sometimes even weekly. And any time you have patients returning on a regular basis, they develop a relationship with that business. A well-established group of patients, in valuation terms, is a Customer Relationship intangible asset, and is one of the factors in determining the value of the pain practice” Spaulding says. “In healthcare businesses you have tangible assets, such as the desks, exam tables, computers, and perhaps an x-ray machine and other equipment. But more importantly, you have intangible assets. Those are the relationships that you develop with your patients, the contracts you have with your suppliers, the established workforce, and your trade name.”
Spaulding says these intangible assets give value to the business being sold.
“Patients for certain models come in and they often prefer to have the same doctor, nurse or technician work with them every visit. That intangible asset developed by a patients’ preference to the businesses’ staff, called an established workforce, may also be a valuable asset. Intangible assets, such as customer relationships and established workforce, are more likely to develop in a pain practice whose patients visit regularly, or in an urgent care practice in a town that has no local emergency room or physician’s office.”
Bernstein explains that an asset such as the workforce is considered a more sophisticated intangible assets that may not be on the balance sheet, but are things that have been created through the business.
“For example, you may have created a workforce, and a business cannot operate without a workforce. There is value to that but there are issues that come into play as to what the value is of the workforce. Are there employment agreements? Are there non-competes? Are non-competes enforceable in the states? How new are those employees? How close are they to retirement? You are not going to pay a whole lot of value for a workforce that may not be there once you buy the business,” Bernstein says.
Jeter adds that a skilled work force would be an intangible asset based upon the facts and circumstances of the deal.
“If you are talking about an at –will state, and you buy a business, the trained work force could leave the next day. You always have to incorporate the risk factors of that into your analysis. That is why when you think about the accounting rules for purchase price accounting; skilled workforce is not an intangible asset that you can put on the balance sheet,” he says.
“As far as importance, once you put intangible and tangible assets together, that’s how you run a business. A business, in essence, is a return on your assets. You bought your exam tables, you have hired staff, you have trained your staff, now you can see patients. Without those assets you can’t run a business,” Bernstein says.
“Once the business is operational, that creates another intangible asset called good will. Included in good will is the reputation of doctors, the reputation of the urgent care center, location etc.”
Bernstein continues by explaining that even the value of a trade name may come into play.
“You may be able to go out and sell “The Best Urgent Care Center in the World” as the name. Someone may want to buy that name because everybody knows that it is top market. There is value in that trade name. Once you start generating cash flow, the value of the cash flow may exceed the value of the asset. At that point is when you have the intangible asset of good will. Goodwill is the intangible value of the business that cannot be attributed to a tangible asset or an identifiable intangible asset like a trade name,” Bernstein says.
Kevin Florenz, managing director with VMG Health says that as far as determining the value of tangible or intangible assets, the nomenclature is the same.
“Most valuation professionals follow the American Society of Appraisers, which define both a cost, a market, and an income approach. The process of applying the approach to value tangible or intangible assets are a little bit different. Traditionally, the real estate professionals will rely on a market approach and/or an income approach. In certain instances, for a building they will rely on a cost approach. For medical equipment, major moveable equipment, or capital assets, we traditionally rely upon the cost and the market approach. The income approach is seldom used because an individual asset usually does not generate a separate and unidentifiable income stream. There are supporting assets that allow that one individual asset to generate a return on the investment,” Florenz says.
According to Florenz, largely from the intangible perspective, most of the time an income approach and/or market approach will be used. He says they are a little bit different from the standpoint of looking at an overall business.
“You are always going to have a value associated with the real or personal property. Depending upon the success of the business, there may be intangible assets that exist, but it is not necessarily always the case,” Florenz says.
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.