Valuations and Selling your Pain Practice

pain practiceIn past articles, The Ambulatory M&A Advisor has examined the valuation process for the average urgent care center and ambulatory surgical center.  What about if you are trying to sell your pain practice?  Is this a whole different ball game? Experts in the healthcare valuation field discuss the details of who is buying, valuation differences between practices and risks that you can avoid with some steady due diligence.  Read on for tips on the process of valuations and selling your pain practice in the current market.

Stuart Neiberg, director with Healthcare Appraisers says that in the current market there is definitely a draw towards hospitals and health systems as buyers.

“They are looking to acquire pain practices over the last few years.  We are seeing a push from a lot of surgery center management companies to acquire pain practices and roll them up.  Then the obvious private equity firms, ACOs and other groups that want to roll practices up in their network in order to gain the intangible resources of a pain practice.”

Vanita Spaulding, managing director at Cogent Valuation has years of experience in working with several high profile healthcare companies.  According to Spaulding, for every business, large or small, and whether it’s a pain practice, a hospital or an urgent care center, the basic valuation approaches are the same (cost, income and market approaches).

“We ask for all relevant documents (like 5 years of financial statements and tax returns, established patient records, etc.); we interview company management to understand the business  we analyze the relevant industry; perform the relevant valuation approaches; and only then do we write the report  So, even though each business is different, large or small, pain management or urgent care, each business deserves a complete analysis before contemplating a sale,” Spaulding says.

Alex Kajan, manager of Valuations & Transactions Advisory Services Division of Altegra Health Inc. explains that whether his company is engaged by a buyer or seller to value a pain management clinic, timing is almost always a concern for all parties.

“Nothing impacts the time necessary to complete the valuation more than the availability and quality of the practice’s financial and operational data.  I would advise anyone who is looking to sell their business to have recent financial statements, tax returns and volume data readily available,” Kajan says.

He adds that this often requires coordination between the clinic’s accountant, billing department/company and the individual leading the project within the clinic itself.

“Assigning this point person early on is also advisable as it provides an efficient means of communication for all parties and helps preserve confidentiality of the engagement within the clinic,” Kajan says.

Spaulding adds that the valuation depends 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 tradename.”

Spaulding says these intangible assets give value to the business being sold.

“Pain practice patients 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.  We don’t see those intangible assets in urgent care clinics where there are few repeat visitors to the clinic – where “Johnny may only break his finger one time, and never need to come again.” She says.

When valuating a pain practice, Neiberg says that there are times when differences are seen when compared to a standard urgent care.

“In urgent care, it can operate like a primary care practice where it has a stable base of patients, but then there are some urgent care clinics that operate more like a free standing emergency department.  You are really relying on walk-in traffic.  When the urgent care center displays those types of characteristics, it’s not quite the same valuation as one more closely modeled after a primary care practice,” Neibergsays.  “Obviously when you are looking at it from a physician practice-aspect where everyone shows up because it’s a doctor that they are comfortable with, then the valuation becomes much more similar to a pain practice.”

Spaulding explains that valuations for pain clinics, urgent care clinics, clinic groups, and other businesses in the healthcare industry may be subject to much greater restrictions upon sale than those found in other industries, due to the Stark Law and Anti-Kickback regulations.

“So we need to perform our valuations with these regulations in mind.  The same consideration of regulations is true also for other purposes of valuation, such as for financial reporting and for tax compliance (e.g., for purchase price allocations,and for estate planning  where we follow the guidelines of the IRS and Generally Accepted Accounting Principles (GAAP),” Spaulding explains.

Spaulding says the valuation approaches of cost, income and market are generally accepted by both the IRS (for tax purposes)  and GAAP authorities (for financial reporting).  Even so , for valuation of healthcare companies, some argue that Stark Law definition of fair market valuemay  only accept a valuation based on the cost approach, which only considers  the tangible assets of the business. Unfortunately, the cost approach only considers the tangible assets of the clinic, and not the intangible assets of the clinic.  Spaulding says this would significantly undervalue the business, and that the best way to avoid a Stark or Anti-Kickback challenge is to very clearly analyze and explain the bases for value of the business, such that the valuation of all the assets are economically based, and not based upon unfair or non-arms-length agreements.

Neiberg explains that if there is a physician owned entity and it’s going to be acquired by a DHS facility, they are going to want to abide by fair market value as interpreted from Stark and Kickback legislation so as not to think that there would be a payment for referrals going forward, or an overpayment of some sort.

Structuring a deal to promote long-term value for the acquiring entity is always important, especially when selling your pain practice.

“Any acquiring entity wants to be sure that the business continues to operate at maximum efficiency post-transaction,” Kajan says.  “This can best be achieved by securing non-compete agreements from the sellers as well as an agreement for the sellers to remain at the clinic for a long enough period to transition the sellers knowledge of operations to the buyers.  Many times you will also see post-transaction compensation tied to productivity with incentives for achieving goals agreed upon by the parties.”

Neiberg explains that if there is a physician owned entity and it’s going to be acquired by a DHS facility, they are going to want to abide by fair market value as interpreted from Stark and Kickback legislation so as not to think that there would be a payment for referrals going forward.

Structuring a deal to promote long-term value for the requiring entity is always important, especially when selling your pain practice.

“Any acquiring entity wants to be sure that the business continues to operate at maximum efficiency post-transaction,” Kajan says.  “This can best be achieved by securing non-compete agreements from the sellers as well as an agreement for the sellers to remain at the clinic for a long enough period to transition the sellers knowledge of operations to the buyers.  Many times you will also see post-transaction compensation tied to productivity with incentives for achieving goals agreed upon by the parties.”

Neiberg goes on to explain that his business has a hand in assisting with the actual structuring of a transaction to the extent that they are on the lookout for red flags in the deal.

“I think that most of our clients want to make sure that we are included in those conversations in case we see any red flags.  Other clients do appreciate our experience, having looked at a number of these transactions,” Neiberg says.

“There is always a risk with pain practices, they could possibly have a “pill mill” mentality” Neiberg says. “I would say from a valuation or financial due diligence perspective, there are times when we are asked to carve out the operations of a pain practice from a larger entity transaction.  Then there are obviously risks with allocating certain expenses, staffand occupancy costs.  An acquirer always wants to make sure the expenses they are inheriting are reflective of the operations.”

 

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