Independent valuations for partnership and shareholder disputes in healthcare businesses

The agreements and the valuation date

The constitution, shareholders agreement, partnership deed and practitioner agreements are read before any financial analysis. They may fix the valuation date, the basis of value, whether a discount applies to a non-controlling parcel, and whether the result binds the parties. An ambiguous clause is for the parties' lawyers, so we value on the instructed reading and note the alternative. Where a court fixes the price there is no fixed rule on the date: in Dr Shanahan v Jatese Pty Ltd, a dispute between ophthalmologist shareholders in a Canberra eye hospital, the NSW Court of Appeal restated that the date varies having regard to all the relevant circumstances and must be fair to both parties. Where the date is contested, we value at each candidate date.

Choosing the method

Most practices are valued by capitalisation of future maintainable earnings: sustainable earnings multiplied by a factor, the multiple, that reflects their risk, quality and growth prospects. A discounted cash flow, which brings projected cash flows back to a present value at a discount rate, suits a business whose earnings are changing in a way one multiple cannot capture, such as a practice mid-fit-out or one that has just lost a principal. A net asset method applies where earnings do not support a goodwill value: in the ICB Medical Distributors buy-out the valuer used an asset-based approach because earnings were negative. Market evidence, meaning comparable transactions, is a cross-check rather than the primary method, because private practice sales are thinly reported and rarely on the same terms. A method adopted without stated reasons is the first thing the other side attacks.

Fair value, market value and the minority discount

A minority discount reduces a holding below its pro rata share of equity value because the holder cannot control remuneration, distributions, strategy or a sale, and a further discount may apply for lack of marketability, since there is no ready buyer for a parcel in a private practice. A control premium is the reverse. An open-market sale of a non-controlling parcel commonly attracts a discount, but where a court orders a buy-out after a finding of oppression the price is set between these parties rather than in a market: in the ICB Medical Distributors proceedings the valuer worked to fair value rather than market value and applied no discount to a half interest. Under an agreement the clause governs. Because the treatment is not uniform, we show the pro rata and any discounted figure separately. See share and equity valuations.

Maintainable earnings in a practice that is splitting

Maintainable earnings are the profit the business can reasonably be expected to sustain, found by normalising reported results, that is, by removing owner-specific, related-party and non-recurring items. They are usually expressed as EBITDA (earnings before interest, tax, depreciation and amortisation) or EBIT (earnings before interest and tax). Those earnings begin with the practitioners who generate them, so we analyse billings by practitioner, replace each owner's drawings with the market cost of the same sessions, and ask which billings survive the exit. Dependence on one person is key-person risk, and it lowers both the earnings and the multiple. In the Shanahan proceedings the primary judge put it plainly, in reasoning the Court of Appeal did not disturb: earnings are not earnings, let alone maintainable earnings, if on the probabilities they would not have been earned. See what is maintainable earnings.

Patients, records, restraint and goodwill

Goodwill is the value of a business above its identifiable net assets: the expectation that patients and referrers will return. Personal goodwill leaves with the practitioner; transferable goodwill stays with the location, brand, systems, contracts and remaining team. A practice cannot sell its patients. Under Good medical practice, the Medical Board of Australia's code, a doctor closing or relocating a practice is expected to give advance notice where possible and to facilitate continuing care, including the transfer or appropriate management of patient records. The Code of conduct shared by twelve National Boards sets the same expectation for dental, physiotherapy, chiropractic, occupational therapy and pharmacy practitioners. A patient list is therefore evidence of likely retention, not an asset to be priced. Whether a restraint binds the departing practitioner is a legal question, so we show the value with and without it. See does a medical practice have transferable goodwill.

Work in progress, debtors, equipment and guarantees

Cut-off at the valuation date decides much of what a departing owner receives. Medicare, DVA, health fund and NDIS claims are paid after the service date, treatment plans carry unbilled work in progress, and a pharmacy carries stock. Working capital is debtors, work in progress and stock less creditors, and the agreement may give the outgoing owner a share of it separately from goodwill. Equipment is valued on the basis the agreement requires, rarely the written-down value in the accounts. Finance leases, the premises lease and personal guarantees are identified, because a buy-out that leaves a guarantee in place is not a clean exit.

Instructed by one side or jointly

The method and the evidence are the same whoever instructs us. The process changes. Where the report is for proceedings we ask the instructing lawyer to identify the rules and expert code that apply, because those set what the report must contain and the duties its author owes. Where both parties instruct us, or the agreement names us as expert determiner (the parties put their evidence to a neutral person and agree to accept the determination), each side receives the same information request, the same assumptions and the same draft, and each has the chance to answer what the other has put. In mediation, where an independent person helps the parties reach their own settlement, the report is a shared starting point rather than a decision. A settlement price is not an assessed value: parties trade certainty, cost and timing, so the figure they sign may sit either side of the valuation. See how it works.