How to Avoid Mistakes in a Physician Acquisition: Q&A With Chris Gauvin of VMG Health

A hospital can improve physician group acquisitions by understanding key decision points of a physician group and criteria to assess the sale of the practice. An important element of an acquisition is the valuation. The valuation of a physician group begins with an assessment of current operations and assets through information provided by the practice. Ultimately, this provides a base for the valuation firm to understand future operations of the practice.

Understanding the valuation process including key decision points will help hospital executives avoid mistakes during the acquisition. Through many circumstances, a physician group has not thought through the entire transaction process, so helping the group understand the post-transaction vision early on in the process is also helpful. If hospital executives can identify and avoid mistakes themselves, they can better guide physicians to avoid mistakes during the valuation.

Here Chris Gauvin, manager at VMG Health, discusses areas ripe for mistakes in a physician practice valuation process as well as methods for hospitals to expedite a valuation.

Q: What are some mistakes hospital executives should try to avoid in a valuation?

Mr. Gauvin: Avoiding miscommunications early on in the process can often save a significant amount of time later. From a hospital standpoint, clear communication between the physician and the valuation firm is of key importance. Often times an initial "kick off" call between the valuation firm, the hospital representative and the physician group, can help remedy any potential miscommunications. When the valuation is nearing completion, it is once again helpful for the hospital representative or the valuation firm to walk the practice representative through the historical financials as well as the projections such that they understand the information used to develop an opinion of value. Miscommunications from physician noninvolvement in the process are avoidable mistakes.

Q: Are there any mistakes that could the valuation outcome?

CG: There are a few key items, which can decrease the valuation price unnecessarily. Poor financial information or inconsistent practice source documentation may cause the valuation firm to use assumptions, which may be overly conservative if the valuation firm cannot support financial information. Although correct, the information may be unable to stand on its own. Additionally, if there are some items which are not communicated to the valuation firm, it is difficult for the valuation firm to identify and give the physician practice credit in terms of value.

Typically, a few specific examples of the types of information often not communicated by a physician practice to a valuation firm would be the following:

•    Onetime or non-recurring expense items over the last year;
•    Physician absences during the previous year;
•    Company investments such as leasehold improvements;
•    EMR cost that was recorded as an expense through the income statement rather than capitalized into the balance sheet.

It is recommended the physician group's accountant interact directly with the valuation firm to identify and quantify these types of issues.

Q: It sounds as if mistakes often slow down a valuation and ultimately a transaction. What are some best practices hospital executives could use to expedite the valuation process?

CG: Hospitals can expedite the valuation process by playing a crucial role in helping fill in any information gaps between what they know about the physician practice operations and what the valuation firm understands, concerning the physician practice's operations. Physicians may not have the time or specific knowledge to provide a detailed set of financial and billing information to the valuation firm. It is often helpful for the hospital to identify a knowledgeable practice contact person, be it the billing administrator, practice accountant or the physician for which the valuation consultant can use as a primary contact from which to receive information. A hospital representative is in a strong position to serve as a liaison between the physician practice and the valuation firm and facilitate the gathering of information. The quicker the practice can provide high quality data to the valuation firm, the quicker an opinion of value can be developed.

Q: I have heard that a valuation firm's approach is important for hospitals to consider. What would you recommend if hospital executives were not comfortable with the approach of a valuation firm the physician group wanted to use?

CG: If a physician would like to use a specific valuation firm, which this hospital was not comfortable with, there are a few ways the hospital could approach this issue.

The hospital should start by highlighting their specific concern with the selection of the valuation firm by the potential seller. The focus should then move to the selection process rather than to a specific firm. Some valuation firms simply do not have the depth of experience or understanding of the specific market trends to complete a valuation and, most importantly, to help see the valuation process through all of the regulatory and legal requirements required for a transaction to take place. The firm chosen should ultimately have a strong understanding of both the local and national healthcare market, an extensive background of valuation qualifications and, of significant importance, a focus in healthcare valuation.  

The selected valuation firm should also have demonstrated historical competency to not just complete an initial opinion of value, but to help conduct the required due diligence, to address issues related to legal and regulatory valuation issues and to provide complete valuation support prior to a transaction's close. The physician practice should understand there may be many decision makers involved on the hospital's side to close a transaction and the decision to not use a valuation firm from a mutually agreed upon shortlist, may delay the process because of aforementioned due diligence requirements.

More Articles on Physician Acquisitions:

6 Best Practices to Streamline a Physician Practice Valuation
5 Considerations for Successful Physician Acquisitions
New Forces Driving Healthcare Mergers and Acquisitions

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