Fake or Real with Anna Brewer: A Medical Practice Has No Value

August 11, 2021

As we emerge from the global pandemic, we are more focused on the bigger picture than ever. In this episode Michael and Brad are joined by special guest, Anna Brewer. Anna shares her expertise as a CVA (Certified Valuation Analyst) on medical practice valuations and principles to follow in order to arrive at a valuation. In this episode we confront the incorrect assumptions most doctors are told about the value of their practice. We share big picture observations for medical practice valuations as we look into the future.

Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at info@byrdadatto.com.


Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues, simplified through real client stories and real world experiences. Creating simplicity in three, two, one.

Brad: Welcome back to another episode of Legal 123s with ByrdAdatto. I’m your host. Brad Adatto with my cohost Michael Byrd.

Michael: Thanks Brad. As a business and healthcare law firm, we’re often immersed in the heavy details of a particular issue or project. It’s beneficial, if not mandatory to every so often, take a step back and evaluate the bigger picture. This season’s theme is Zoom Out. We have all been immersed in the life of a global pandemic. And so we’re going to make sure with each story this season that we take a step back and look at how the issue that we’ve discussed will be impacted in our new normal.

Brad: Michael, I’m excited for today’s episode. We have our own version of MythBusters. For this episode, we’re going to [00:01:00] find out the notion. A medical practice, does it have any value or is there any value with it? Is that true or is it a myth? So this is pretty exciting stuff.

Michael: Yeah. I think it’s what we hear in the locker room. A medical practice has no value.

Brad: Yes. That’s what we hear all the time.

Michael: It’s hard to imagine. Anything not having value in this day and age. I read an article

recently that a parking spot in Hong Kong sold for $1.3 million.

Brad: Do you think this is one of those parking spots that are super wide, so you can guarantee no door dings, or maybe it’s really close to the front entrance, like this isn’t the back of the parking lot. Do you know much about this spot?

Michael: It’s location, location, location.

Brad: That kind of reminds me of what’s happening right now. As we record this like what’s happening in housing market.

Michael: We hear all the time stories about sellers receiving multiple offers over asking price for their houses. Sight-unseen. The one that stands out most to me is a [00:02:00] story I read in May where a buyer paid 300,000 over asking price for a million dollar home and barely won the offer.

Brad: Is that the house you bought Michael? Is that why you know about it?

Michael: No, no, it would not be me.

Brad: Well, I heard that somebody had actually put on their offer sheet that they would name the first born child after the seller, if they picked their bid. And they still paid over offering price and they still lost.

Michael: Housing is something at least I understand. Are you familiar with NFTs? This is the craziest thing for me to wrap my brain around.

Brad: Yes. Non fungible tokens, which sounds really sexy. Yes. I’ve had trouble kind of fully comprehending it myself. I’ve actually read a couple articles on it. And I actually listened to podcasts that discussed it. And I am still not sure if I actually truly understand it.

Michael: My assistant Siri told me that NFTs use [00:03:00] blockchain technology to authenticate digital assets. If you ask me to explain what I just said, I can’t. Because now we have to explain why blockchain technology is. But I mean, the point is you read these articles and these digital assets can be bought and sold. Sometimes in crazy amounts. I read an article that the Artist Beeple’s recent $69.3 million payday was from a single digital artwork. And then I read somewhere else that the Twitter CEO, Jack Dorsey sold a NFT of his first tweet for $2.9 million.

Brad: Yeah. And that goes on into the sports world where we have now, the NBA has their own trading card company that sells these digital versions called Moments, Michael. It’s a Moment. People so far since they’ve launched this, have spent over [00:04:00] $230 million buying and trading these digital Moments anywhere from 50 bucks all the way to a $200,000 for a dunk. And of course the strangest part to this is where I have trouble wrapping my brain around it. I can go find that digital moment right now on ESPN or watch the video itself. And no one can stop me.

Michael: The best explanation I ever heard was actually recently on a podcast and someone was like, yes, you can go and buy a copy of a Picasso but you want to get the original, if you’re going to pay top dollar for it. It’s just all this technology piece, is what makes my age reveal very quickly. So hopefully today’s guest can help us on a different valuation question and they can help with the kind of MythBusters premise of a medical practice has no value. Is this a fake or [00:05:00] real statement? Today’s special guest is Anna Brewer. Anna is a partner in the consulting services division for J Taylor. J Taylor is an office based in Fort Worth. They started as a CPA firm and has evolved based on their successes to providing strategic help for businesses. They have four main divisions. They have a consulting services division, this is where Anna is a partner. They have tax services, business services and assurance. Anna’s practice focus is on physician compensation, transaction support, valuation, due diligence, joint venture development and strategic business plans. Anna has a BBA in accounting from TCU, oh Brad. What am I going to do today? She has at some point earlier in her career worked for, I think, two of [00:06:00] the, what they call big four accounting firms. She is a contributing author in healthcare for Fort Worth business press. She was previously a 40 under 40 honoree. And we’re super pumped to have Anna here. Anna welcome.

Anna: Thank you so much. I appreciate it.

Brad: Well, we’re real excited as Michael said to have you join us today. It’s probably not just because it’s the first time ever in our several seasons of this podcast that we’ve had two awesome horned frogs in the same episode. I mean, I think right there, we could just stop and everyone could just be happy knowing that two horned frogs got together for an episode.

Michael: I see what you did there. You assume that you’re awesome. We have one awesome horned frog.

Brad: Fair enough. This really does change everything, Michael. Anna, as Michael kind of walked you in here, obviously you have this long, great history and well respected. We have over the years of mutual clients and you’ve helped us a lot with these [00:07:00] practice valuations, but really before we jump into today’s story, could you please kind of share with our audience what made you go into this profession?

Anna: Sure. Probably sort of an interesting story. I have a lot of varied interests, always have. So it started out college as an econ major. And at one point was even an art history major, which is something that not many accountants could say. But in my schooling, I spent some time as an intern, really at a firm in Dallas. That was an interesting CPA and wealth advisory firm. It specialized in dentists and worked there a couple of summers and understood just what the intersection was between the entrepreneurial aspect of running any sort of medical practice, with the wealth aspect and then really trying to make sure that good care was provided and being exposed to that made me think that I needed to be in business. Then looking around [00:08:00] at business degrees. I guess I’m a little bit of a glutton for punishment, but figured that if I could do accounting, then I could do some of the other things as well. So it’s a degree that has a lot of opportunities in it. Then lastly, my goal was to try to figure out how to do something that was not tax or audit with an accounting degree. So that’s a little bit of a unique path that led me to where I am.

Brad: That’s cool.

Michael: Yeah, that’s awesome. And I did not know that you’re one of those people that can use both sides of your brain. So nice to hear about the art side.

Brad: Yeah. I can barely use one side.

Michael: All right. Well, since Anna, since I know you and I know the answer, I’m sure you cringe a little, when you hear the statement, “A medical practice has no value.” And to avoid a spoiler to the answer. Let’s first start with the basics. Talk about what goes into a medical practice [00:09:00] valuation and the basic principles you follow to arrive at a valuation.

Anna: Absolutely. Well, the first thing that we ask when we’re looking at a valuation is what’s the purpose for this valuation? So whether it’s an IRS issue and we have some sort of a state filing or some sort of large transaction that we’re trying to paper for tax purposes, or whether we’re talking about regulatory concerns, which in healthcare, we often run into those around Stark and Anti-Kickback, corporate practice of medicine, those sort of things. And so that’s generally the first question that we ask is why are we doing this valuation? Then sometimes we’re doing valuation just for buy-sell purposes between physicians so that they can bring others into the fold and do succession planning. Any of those purposes, there’s generally some sort of a standard of value or something that a credentialed valuator needs to hit from a standard perspective. Really any credentialed [00:10:00] valuator is going to have to deal with three approaches to valuation. Those three approaches are the cost approach, the market approach, and an income approach. The cost approach, if you think about it really doesn’t have a lot of application to a physician practice because that’s really looking at the underlying assets of the company and trying to determine maybe what the salvage value is of the underlying equipment. With medical practices being similar to accounting businesses or law practices, we all like to think that we’re worth more than just the tables and chairs that are around us, right? So that’s often not a good pathway, but one that we have to at least consider. Another approach is the market approach, the market approach is as you were just noting real estate transactions right now. And it’s one that we think about often. When we’re buying houses, of what are the other houses going for right now? What are the comps? And so we use comps sometimes and valuation to take a look at [00:11:00] what other businesses are going for. Then lastly, there’s an income approach and the income approach is where we really rely on the most. And that is what kind of cash comes off this business year over year. And what can an investor get from a return? Really we use the market approach and the income approach the most. Most folks talk about transactions and in terms of the market approach, because they talk about multiples and what their buddy got for his business or his practice. But it has a lot of difficulty in identifying the nuances of a business. So every once in a while I get a phone call where somebody says, Hey, I need valuation of a urology practice in St Louis that has 15 physicians. That’s mainly Medicare and the physicians are really highly productive. What’s that going to go for? Well, as you’d imagine, it’s tough to find publicly available information that [00:12:00] tells me what 15 urologists in St. Louis that have a certain kind of payer mix are going to be worth. So we often use the market approach as a way to talk about transactions and a checkpoint, but really it all comes down to, what’s the cash coming out of the business and what’s the profitability of the business.

Michael: Right? You said something that so I’m going to hit something, I’m sure you get to talk about it on a weekly basis. You’re talking about the idea in accounting or legal or medical practice that you know we think we’re worth more than the tables and chairs and kind of the opposite thing that we get hit with all the time, which is probably where the locker room talk comes from is that this whole idea of Goodwill and that that’s not part of the value of a practice. And so how do you deal with that? If you’re using the income approach and someone says, well yeah that’s great. But when the doctor leaves, the patients are going to go [00:13:00] elsewhere or you can’t predict that they’ll stay, how do you kind of sort through that and your valuation approach.

Anna: Yeah, there’s a lot of noise in this conversation because like most business owners positions, if they own a practice they are going to take all the money out at the end of the day. Right. So if you were to pull a tax return for the vast majority of practices, it’s going to show that there’s $0 of net income. And so that causes then a problem for valuators who are not accustomed to medical practices or professional services companies at all in, well, then there’s nothing left over for an investor to have from a profit perspective. And that while that may be true, it’s definitely something that can be changed. So often what we get into very quickly in a medical practice valuation is, what is the physician’s compensation that’s embedded in the assumption of how the practice runs? And while there may not be profit, historically, there can definitely be [00:14:00] profit on a go forward basis. If the physicians are willing to change the compensation plan. So that’s one way that we get there from an income approach. And then what we talk about a lot behind the scenes is, what are the other intangible assets within a practice, such as the covenants not to compete the patient lists, the trade names, and any marketing or website materials that may exist out there? And we do have the ability to carve those out as well, and look at them separately to try to make sure that we’re really taking care of the entire practice.

Brad: Yeah, that’s makes sense. You know, well you have worked with our firm in a couple of different matters over the years, some of which has to do, I mean, it was great the way you kind of set it up was someone had to do with regulatory analysis as to whether or not those meaning a stark or anti-kickback and otherwise has to [00:15:00] do with the business succession planning. And obviously we won’t name our client in this one, but you recently helped out on a practice valuation for a long time surgical client of ours. And it sounds like you were kind of hitting on most of those points right now, but I think for our audience to understand, this particular medical practice, it had its medical practice that had a med spa and it had an ambulatory surgery center. Why don’t you explain to our audience how you would break up that approach in the valuation when ancillary businesses are involved?

Anna: Yeah, absolutely. You know, this client was like probably a lot of your clients and a lot of mine, where in addition to all those entities, they also had real estate. And so some of our job is untangling all of these different legal entities and making sure that we have a very clear view of what’s the profitability within all of those legal entities, because they it’s a closely held business, all the books are commingled. [00:16:00] so we need to pull those apart, maybe all the staff is in one entity, but at leased out to another entity, or maybe we have a loose lease agreement for the building, but maybe it’s not always paid from a rental perspective. So some of my work has, is related to normalizing the books or what we would call fixing the books from that perspective.

Brad: I like normalizing and fixing sounds like you’re doing something bad. Normalizing sounds like, oh, this is normal.

Anna: Well, you know what? It is normal. Nine times out of 10, we have to look at those sorts of things, particularly when there’s related parties involved. So yeah, but this client was a little bit ahead of the game as far as thinking about five to 10 years into the future, what they wanted to do in the practice and trying to figure out whether they should entertain more, what I would call a physician aggregator or a private equity, purchase, or whether they’d like to transition it to a recruited physician. But they had a similar situation as a lot [00:17:00] do, and that if you were to look at the practice, a very well-run practice, very well managed practice. The books indicated that there was no income at the end of the day. And the reason was because they had taken it in the form of compensation, which of course you would from a tax perspective and you would as a business owner. So very quickly we get into looking at the physician compensation and making sure that we can provide a compelling package for a physician who may enter the practice. And making sure that we can think through the succession of how we get a newer position up and running in the practice, how we market them, how we transfer patients to those younger physicians and how then we make sure that some of the equity that is created with them joining the practice then gets transferred over via some sort of a buy-sell agreement.

Brad: Excellent.

Michael: So with all of that, is it true or is a myth that a medical practice [00:18:00] has no value?

Anna: I guess I would say it is possible that it doesn’t have value, but we rarely ever see a practice that does not have value. When we do it, man, it is dire circumstances where there’s some sort of disability or death or something like that. But the vast majority of the time when cooler heads prevail and with logical folks on both sides of the table, we can arrive at a value that makes sense from the perspective of what assets are really being transfer, whether that is a little bit of reputation training. Even the know-how of the staff, that is a very valuable thing and very expensive to build from scratch. So often we can ascribe a significant amount of value to the practice.

Michael: Well, and you raised a great point and just in how you answered it. And Brad and I talk about this, when we’re talking to doctors about when to start looking at this and they are directly impacted. Brad got a call at [00:19:00] one point in the last couple years where it was “Yeah. Hey, I’m thinking about retiring,” and Brad, is like, “Okay, great. Well, let’s start working,” and he’s like, “well, I’m not sure if it’s too late to get value out of it.” And so Brad asked the next question. It was like, “yeah, I’m retiring in 30 days.”

Brad: Well, and moving to England.

Anna: Oh yes, those are circumstances where you may get closer to zero unfortunately. So we advise folks all the time, to start early and start thinking about it maybe five to 10 years before you really think about retiring. And I would say closer to the 10 year mark, I’m surprised at how quickly the business can slip away. Maybe you take one or two more days a year off from your medical practice and those one or two more days a year that you take off as you moved towards retirement, really impacts the bottom line and impacts my job and my ability to really maximize the value, [00:20:00] in any sort of transaction.

Brad: Well, Anna, this season, the theme is zoom out, as Michael said in the beginning. And as we emerge from this global pandemic, we would love your big picture observations for medical practice valuations as we look into the future.

Anna: Well, I guess along the theme of factor myth, what we are seeing right now is that medical practice valuations are very strong. We’re seeing multiples right now that we have never seen before. Even some that maybe don’t make a lot of sense from a finance perspective. So that is good news for some of your listeners who may be entrepreneurs and physicians who are thinking about looking at selling their practice. And really that’s driven by private equity, having a little bit too much money on the sidelines right now. They don’t make their management fees and don’t get their returns unless they deploy the capital that they’ve already raised and there’s way too much on the sidelines. So we’re seeing a similar to the [00:21:00] real estate market. We’re seeing bidding wars related to practices right now. Now that’s not the only kind of transaction, but it definitely influences the other track transactions that are not private equity related. So that’s something that we’re seeing right now that are pushing healthcare deals up, because private equity is super interested in healthcare right now. Then another thing I would say is that we’re doing a lot of due diligence related to transactions. I think all of us are going to have to relive COVID a little bit, as we explain what our financials have looked like in the past. And I think, unfortunately we’re all going to have to relive COVID for the next, probably three to five years. If you’re going to do a transaction, because you’re going to see a blip in 2020 and the financials. An explanation needs to be made with regards to exactly which days the practice was shut down, how staff was furloughed, how they were handled when they were brought back on, when ORs opened back up again. What kind of payer [00:22:00] mix was affected? We’re seeing unemployment numbers that are wiggling around in different states. And it’s an interesting conversation because it’s changing. What historically has been a little bit more of a national landscape to be more geography specific as we see states recovered differently and how that affects medical practices? So I think that’s something that everybody jotted down some notes as far as when they were out of the office when they were in the office. That would probably help if you have some sort of a forecast or a transaction in the future.

Brad: Great point. Although I would like to say that I would like it one day when we can’t remember why that happened. So that would be a good sign that, oh wait. Oh yeah, there was COVID I forgot about that.

Anna: Yeah. I don’t think we’re close to that.

Brad: No, I know we’re not. I just said, I’m looking forward to that moment.

Anna: Yes. And I guess I would add one more thing. Everyone’s talking about telemedicine right now, and we’re doing actually a couple of large transactions around telemedicine at the moment, but [00:23:00] I think the way that all of us as consumers have been sort of catered to during COVID of having our groceries able to be delivered to us and being able to pick up food and restaurants and things like that. I know telemedicine has a piece of that in healthcare, but I also think just customer service within healthcare is going to change quite a bit. I think patients are going to be a whole lot less willing to sit in a waiting room and wait on a physician for 45 minutes. I think all of us are more accustomed to checking in on our phones and sitting in our cars and maybe listening to our preferred music instead of sitting in a waiting room with a bunch of people. And I think there’s just going to be some operational things about a practice around customer service. And customer touch that is going to have to change. As we move forward.

Brad: Great point.

Michael: Yeah. I’m curious, you said something for our audience, and you talked about the multiples going up for practices and private equity coming in. Just talk a little bit about kind of the [00:24:00] traditional range of multiples you might see for a medical practice and kind of some examples of what you’re seeing now, just in general terms.

Anna: Absolutely. Multiples are kind of a distillation of normally what we would call a bunch of other factors. So this is not a perfect science, but it is absolutely the language that people talk about. Historically we saw multiples for physician practices somewhere between three and five, often hitting the four mark, and those were pretty comfortable ranges and makes sense from finance perspective of the time value of money. The cost to get debt and things like that. We are absolutely seeing them more hovering in the seven to nine range right now, have been involved in some that are fifteens.

Michael: Wow.

Brad: Wow.

Anna: Incredible. And seeing them go up from there when we’re talking about telemedicine or practices that have somehow really harnessed technology and have some sort of software platform [00:25:00] that they’ve associated themselves with. So it is really wild right now on the transaction scene.

Michael: And just to clarify too for the audience, because I know exactly what you’re talking about. When you say a multiple, we’re talking about a multiple of earnings and probably adjusted if they’re taking all the money out, you do kind of add backs, like you mentioned earlier.

Anna: Yeah. Like if you’ve done a really great job of saving for retirement that have funded a more rich retirement plan than most, or maybe you have a car running through the business for when you’re driving back and forth between a surgery center or a hospital. But yeah, we can add those things back and definitely increase the EBITDA, which then the multiple is used on.

Michael: That’s amazing. Thank you so much, Anna. We’re grateful to have had you with us on the Legal 123s with ByrdAdatto. We’re going to say goodbye. Go into commercial and on the other side, Brad and I will share any legal insights from today’s episode. [00:26:00]

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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my co-hosts Michael Byrd. Now Michael, it was awesome visiting with Anna, on practice valuations. I know that every single time we were around her, I feel like I’m learning something new. Even if it’s something I’ve heard before and I guess the most important thing is it does appear that practices do have value, Michael, which is shocking, except to you and I. But Michael, this [00:27:00] season’s theme is Zoom Out and as part of the Zoom Out theme, let’s talk about the bigger picture when it comes to medical practice valuations.

Michael: Yeah. And Anna touched a little bit on this at the end, and I just see a shift in the climate of how medical practices will be sold into the future. So we have couple of dynamics, one of which Anna didn’t talk about, which is that an unprecedentedly high number of physicians coming out of school or being employed physicians with hospital systems and otherwise. And so private practices, the pool of candidates for young doctors to buy practices or join as partners is going down. And so I don’t think that’s going to go away. It’s just going to be impacted by that. And then as Anna mentioned, you have this idea of private equity coming into healthcare. And as we talked about on a prior [00:28:00] episode. You now have private equity into the medical practice space and you have lower number of physicians who are potential buyers. And I think ultimately there may be some times where the market behaves, like what we’re seeing right now, both in healthcare and all these NFTs and other stuff where it’s just kind of almost irrational behavior from the standpoint of there’s more money out there to be invested than a supply and demand thing. So the prices get driven up, that may be more of a factor when you have private equity involved, but I also think the root behavior, the root issue in practice sales is going to be a true issue going forward as it is today. And as it has [00:29:00] been historically, and that is what happens to the patients after the acquisition when you buy, and the doctor either stays on or leaves, is patient behavior to the practice going to change. And that’s going to be the most influential element in the long run.

Brad: You know, Michael, I’m going to Zoom Out a little bit further. And I think all those points are all perfect, in the sense of understanding the big picture. For me, I want to take it a further step back in the sense of really truly understanding what is the purpose is what she said in the beginning of this episode was, what’s the purpose of your business? That actually controls what’s the purpose of her valuation. So those are both very strong statements because depending on us, as she even articulated depending on the time that you have, in which you plan on selling will impact the overall valuation. And [00:30:00] we’ve talked about this in other episodes, but really is what phase of your business are you in right now? Are you getting ready to form and you’re starting to think about it. So when we’ve had Tim Sawyer or Ben Hernandez on here, they talk about that purpose. Or are you further along? You’ve been practicing for 10 to 15 years. And now you’re trying to figure out if I’m going to build up my plan. What is that going to look like? From a big picture and that’s going to obviously impact your valuation and what things you have to pivot. And finally, last, but not certainly least by any means is what do you want to do as you near the end of your professional career? Anna had mentioned, some people want to start working a lot less. And so if you’ve already kind of started building into your exit plan that process, your valuation shouldn’t be impacted by that. So that’s taking a bigger step back as to kind of really think about it. But you know, Michael, before we tune out, I know we’re kind of close to time. Do you have any final thoughts?

Michael: Yeah, I mean [00:31:00] I’m looking forward to the audience being able to buy this episode as a Non Fungible Token. I’m sure the value is going to be through the roof, millions of dollars.

Brad: Obviously. You’re correct on that one. All right. So that’s all the time we have today tune in next week for the new episode titled Being Disabled By Your Corporate Documents.

Outro: Thanks again for joining us today. And remember, if you liked this episode, please subscribe. Make sure to give us a five- star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, [00:28:00] nor does it establish an attorney- client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.

ByrdAdatto Founding Partner Bradford E. Adatto

Bradford E. Adatto

ByrdAdatto founding partner Michael Byrd

Michael S. Byrd