Over the last several weeks, we have taken you through multiple aspects of valuations, diving into topics like Fair Market Value (FMV) and Investment Value.
Now, we’d like to finish off the series by recapping some of what we feel are the more important points that have been covered.
In our first installment on FMV we introduced the Internal Revenue Services’ definition of FMV, which is:
“the amount at which property would change hands between a willing seller and a willing buyer when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and when both have reasonable knowledge of the relevant facts.” (Revenue Ruling 59-60)
What we discovered is that this definition contains multiple terms that needed further defining. The Stark Law also presented another definition of FMV that contains slightly different wording.
To see our dissection of these two definitions, visit Part One of our valuations series here.
Once a breakdown of the definitions of FMV has been established, it is easier to delve deeper into what it really means and how the definition can and should be utilized. This is where Part Two on FMV comes into play.
According to Deepa Menon, Managing Director at CBIZ Valuation Group, LLC, and her associate in healthcare valuations, Jennifer Smith, there are multiple ways in which FMV can be derived. These include the income approach, cost approach, and market approach.
In order to perform any of these approaches, market data is necessary. This can come in the form of market surveys and the like which compare different businesses and organizations that possess similar qualities. Valuators need to be wary of “tainted market data,” according to Jason Ruchaber of Root Valuations.
“Because transactional detail is often limited to basic financial information, geography, basic deal terms, etc., it is often difficult to know with any level of certainty that the market data points are not tainted,” he said.
What with the obstacles of tainted data and insufficient market comparables, we raise the question of whether or not a third party independent valuation is even necessary.
“The law does not require the parties to a transaction to obtain a formal independent valuation to support the transaction,” said Blayne Rush, President of Ambulatory Alliances, LLC. “The law requires that the transaction conform to Fair Market Value. I do not believe the parties to a transaction that consummate a deal at FMV, truly understand the tenets of FMV and have a well documented process that comports with FMV are under any risk.”
Part Three focused in on the topics of Strategic Value and Investment Value.
Investment Value is described in the International Glossary of Business Valuation Terms as, “The value to a particular investor based on individual investment requirements and expectations.” Strategic Value or synergistic value is very similar, but instead of being the value to a particular investor in applies to a pool or group of potential buyers.
“Synergies can be cost savings and or revenue enhancements that are achieved with business combinations,” Rush said. “This value is not presented on the financial statements but you accomplish this by recasting and negotiating the allowed synergies. This is not prohibited by the Stark definition or the case law. The hurdle is that synergies fall outside of the valuation professionals’ FMV definition. Many sellers do not understand this and leave money on the table.”
This type of valuation, according to Menon, can be more reliable than the others in that it is a valuation tailored to a specific transaction.
The last two articles published in our series placed the spotlight on Market Value (MV) and what it really means.
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).
However, in actuality the worth or value of a center at any given moment hinges more on the purpose of the valuation being done.
When it comes to MV and arm’s length negotiations, bargaining, bona fide offers and other arm’s length negotiations can serve as sources for market data in the valuation process.
“As we have discussed, the centerpiece of the Stark definition is the negotiations with the subject party and the general market as a whole,” Rush said. “The negotiations with other parties to buy the same center will help support the price and terms that were ultimately agreed to by the parties to the transaction. With the majority of the transactions that I am involved with and that I am exposed to, the Anti-Kickback Statue is actually what holds, and that requires the government to prove that there was intent to pay for in essence referrals or some other prohibitive value if you will.”
You can read further about aspects of MV like arriving at FMV through the MV approach, bargaining as market data and arm’s length bargaining in Part Five of our series.
While there is so much more to FMV, Investment Value and MV, we hope that our series has provided a firm starting point for you understanding of these topics. Be sure to check back with The Ambulatory M&A Advisor for consistent and relevant updates on valuations of ambulatory centers and the like.
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