by Jason Ruchaber, CFA, ASA

Physician practices are typically appraised using one of two methods, the discounted cash flow (DCF) method of the income approach, or the adjusted net assets method of the cost approach.

Under the DCF Method, value is measured as the amount of income that is expected to be earned through ownership of the practice after paying all expenses, including a market level of physician compensation. In developing the DCF models, key assumptions that drive value typically include (but are not limited to):

  • Overall revenue and profitability trends
  • Diversification of physicians, medical specialties, and/or service lines
  • Presence and utilization of midlevel providers (NP, PA)
  • Existence and profitability of ancillary services (e.g., imaging, lab, etc.)
  • Payor mix and reimbursement rates
  • Staffing levels and retention rates
  • Revenue model (e.g., FFS, managed care, concierge, etc.)
  • Expected continuity of providers and staff
  • Physician compensation model

Under the Adjusted Net Assets Method, all of the assets and liabilities held within the practice are restated to market values. Therefore, key value drivers under this approach include:

  • Age and composition of tangible assets (equipment, buildings, furniture, etc.)
  • Existence and value of identifiable intangible assets (e.g., trade name, favorable contracts, assembled workforce, etc.)
  • Expected continuity of providers and staff
  • Amount of debt and other contractual liabilities (if debt are to be assumed)

Practice valuation involves a myriad of variables and can often result in a wide range of opinions on value based on the models used. Ultimately, the most important factor to consider is selecting the right source to successfully appraise your practice so that you arrive at an accurate fair market value.

At Root Valuation we specialize in helping physician leaders successfully navigate business and employment transactions to that their value is fully realized. If your organization needs help conducting a valuation for your physician practice contact us at

by Gabriel Andrada, MHA, CSAF, CHBC, CVA

Normalization adjustments in valuations

In valuation, “discount rates” refer to the investment rate of return used to convert the future anticipated cash flows of a business to their present value equivalent.  The term “discount rate” is synonymous with “cost of capital” or “required rate of return,” which is essentially the rate of return needed for a potential investment to be considered worthwhile based upon its risk profile.

Simply put, the cost of capital represents the interest rate that must be paid to investors to attract their capital. The cost of capital varies from entity to entity based upon the overall risk of the investment.  Factors that influence perceptions of risk may include:

  • Historical financial performance
  • Leverage (debt)
  • Age and size of the business
  • Sensitivity to industry or economic forces
  • Geo-political risk
  • Population demographics
  • Technology, etc.

As noted above, a discount rate represents a rate of return used to convert a series of future cashflows into a present value. This effectively considers the concept of the time value of money, where cashflows in the present are more valuable than expected cashflows from the future. There is an inverse relationship between present value and risk, whereby expected future cashflows that are less certain (riskier) are discounted more heavily than cashflows that are more certain.  In short, the more “risky” the future cashflows of a business is, the higher the discount rate will be, and thus the lower the present value of such cashflows.

At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about your business valuation, contact us at or speak with Gabriel Andrada at 720.634.7025.

goodwill in physician practice

by Jason Ruchaber, CFA, ASA

The International Glossary of Business Valuation Terms defines goodwill as “that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.” Similarly, the IRS defines goodwill as “the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor.”

Mathematically, goodwill is simply that portion of the overall business value in excess of the identified assets held within the business. Most often, goodwill value is created when the profits generated by the business exceed the rates of return that would normally be earned on the assets utilized by the business.

For physician practices, payment for “goodwill” was a bit of a regulatory boogeyman due to the infamous 1992 “Thornton letter”, where Assistant General Counsel to the Office of Inspector (OIG), D. McCarty Thornton, reasoned that “any amount paid in excess of the fair market value of the hard assets of a physician practice would be open to question”, and further citing goodwill as a specific item of concern as a potential payment for a referral stream.

As a matter of practical consideration, a profitable going concern business will almost always have some level of goodwill value, and the seller of that business – whether it be a healthcare business or otherwise – would not be willing to simply give up value associated with that income stream absent purchase consideration. Since the issuance of the Thornton letter, there has been significant clarification on the issue of how fair market value and the “value or volume of referrals” is defined for healthcare regulatory purposes. These clarifications have alleviated most of the concerns related to the payment of goodwill in physician practice transactions, however, there are still some important considerations that should be followed.

Because goodwill is simply the difference between the overall value and the sum of its identified assets, the determination of overall value must be specified in a manner that is consistent with the regulatory definition of fair market value and not in a manner that takes into account the value or volume of referrals. Though not an exhaustive list, things that should not be included in the valuation model include:

  • Enhancements to value that result from buyer specific synergies such as favorable payor contracts, increased utilization, or reduced overhead costs.
  • Consideration of any extraneous or downstream revenue sources related to the existing patient base, but not currently billed in the practice. This may include as surgical facility fees, diagnostic imaging, pathology, etc.
  • Inclusion of personal goodwill that is retained by the selling physicians. Often this can be accounted for by properly modeling the post transaction compensation model, but there may be other carve-outs or exceptions that impact the economic value transferred beyond the comp model.

Physician practice valuation has numerous complexity and regulatory restrictions not found in other industries, but when properly fair market value is properly specified, goodwill value can (and should) be paid for in physician practice transactions.

At Root Valuation we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. If your organization needs help navigating your goodwill within your physician practice contact us at

by Gabriel Andrada, MHA, CSAF, CHBC, CVA

Normalization adjustments in valuations

In valuation, “normalization adjustments” are the adjustments made to reported financial statements to better understand the true financial and operating performance of a business for investment purposes.

Normalization adjustments may include the elimination of non-recurring or non-operating income or expense items, the removal or normalization of owner discretionary items (including officer compensation and related party transactions), or adjustments to accounting entries (such as accelerated depreciation, prior period adjustments, journal entries, etc.).

In some instances, it may also be appropriate to make run-rate adjustments to reflect the anticipated full year impact of mid-year changes. For example, if a new physician is hired mid-year, that physician’s patient volumes and revenues will be understated for that year and should be annualized to reflect the anticipated full-year volumes. Similarly, that physician’s compensation will also be understated and should be adjusted to reflect the full year cost of salary and benefits.

In larger, more complex transactions, the normalization process may be conducted as a more rigorous, standalone process. This process, referred to as a Quality of Earnings (QofE) analysis, is a detailed analysis of a company’s financial and operational data that provides additional assurance that the EBITDA is sustainable. Procedures performed in connection with a QofE analysis may include:

  • Revenue Testing
  • Revenue to cash reconciliations / comparison of financial reports (e.g., internal financials, tax returns, etc.)
  • Review of charges and collections trends by payor class, identification of trends, review/discuss historical and pending contractual agreements
  • Preparation of cash waterfall schedules by payor class / presentation of accrual revenue estimates
  • Normalization of non-recurring events / go-forward changes
  • Expense Testing and Normalization
  • Review and discuss expense policy, discussion of use of estimates/allocations
  • Trend analysis (% of revenue, $/unit)
  • Comparison of reported expenses to key contracts (e.g., rent, equipment leases, service contracts, etc)
  • Cash to accrual estimates
  • Normalization of non-recuring items / go-forward changes
  • Working Capital Analysis
  • Review of accounts receivable aging by payor class over time
  • Analysis of collection ratios and bad debt policy
  • Review of reported current liabilities
  • Prepare estimate of required working capital
  • EBITDA Run Rate analysis
  • Testing of Balance Sheet items

In short, normalization adjustments allow the appraiser (and investor) to better understand and measure the true financial position of a business. Normalized earnings are the measure that should be used for valuation purposes including the application of a valuation multiple or as the base year in a financial forecast.

At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about your business valuation, contact us at or speak with Gabriel Andrada at 720.634.7025.

how to select an appraiser


by Jason Ruchaber, CFA, ASA

We suggest considering three primary criteria – Credentials, Experience, and Fit


Professionals who hold themselves out as appraisers should hold a professional certification in an appraisal discipline from one or more credentialing organizations. Though not an exhaustive list, the following are some of the more widely recognized designations for business valuation ·


When selecting an appraiser it is important that the appraiser have direct, meaningful experience valuing the subject Appraisers work in a vast number of subspecializations, including: ·

  • Appraisal Discipline – Business valuation, compensation valuation, machinery and equipment, real estate, intellectual property, gems and jewelry, fine art, etc.
  • Organization Type – Public company, private company, start-ups, tax exempt organizations, etc.
  • Asset Category – Equity, stock options, ESOPs, warrants, derivatives, debt instruments, etc.
  • Industry or Sector – Healthcare providers, life sciences, healthcare entities, Health information technology, etc.
  • Intended Use – Mergers and Acquisitions, financial reporting, tax reporting, regulatory compliance, bankruptcy, dispute resolution, etc.

Due to the significant body of knowledge, regulation, and practical nuances associated with each of these areas, it is no longer adequate to be a valuation generalist and remain proficient in rendering a credible opinion of value.


When selecting an appraiser it is also important that they are a good fit for your organization. Just as a physician’s “bedside manner” can impact the patient’s

understanding, acceptance, and attitude toward their diagnosis, so too can an appraiser’s approach to the valuation assignment impact the understanding, acceptance, and attitude toward their findings. Some characteristics to consider include:

  • Accessibility –work hours, response time, preferred channel- email, phone, text;
  • Professionalism – knowledgeable and relatable to internal and external stakeholders
  • Emotional intelligence – ability to navigate egos, personalities, and stresses of process
  • Openness to Input – ability to listen and adapt as they navigate the appraisal
  • Attention to detail – ability to identify trends, issues, and nuances of from the data
  • Manner of speech – ability to communicate complex financial topics in a manner that is easy to understand
  • Integrity – are they willing to do what’s right even if it’s not the desired outcome

Different circumstances may call for different characteristics in an appraiser, but the best appraiser for your organization will be one that mirrors your culture and values and can present a compelling and defensible valuation opinion.

At Root Valuation we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. If your organization needs help navigating your appraisal process, contact us at

by Gabriel Andrada, MHA, CSAF, CHBC, CVA

During the last two years, the healthcare industry has faced numerous challenges including the response to COVID-19, staffing shortages, migratory patient populations, and new or changing regulatory guidelines.  While some of these challenges may be transitory, the economy continues to be subject to significant uncertainty.  For healthcare entities considering a sale, joint venture, or other business transaction, these challenges and uncertainties can make the determination of fair market value difficult. Here is a recent example of a challenge we faced when valuing a business undergoing change:

  • A surgery center had expectations of a significant increase in case volumes due to a migration of surgeons leaving a competing health system. The ASC had already begun conversations with some of these physicians indicating that some capture of these cases was likely, but specifics regarding the volume, type, and timing of any new cases was highly uncertain.

Problem:  Valuing the center as status quo could lead to an undervaluing of the center, but including these volumes requires speculative assumptions and could over value the center.

  • Uncertainty such as this needs to be taken into consideration and can be typically addressed in two ways.
    • One is to include an estimate of most likely volumes and then account for this uncertainty is through an increase in the company-specific risk component of the discount rate (using the discounted cash flow method). A potential drawback to this is the lack of a precise way to measure the appropriate level of riskiness to account for the uncertainty of additional case volumes.
    • Consideration of conducting a probability-weighted scenario analyses to derive a range of values. This involves deriving a baseline conclusion of value using the status quo, and then performing one or more analyses that assume Some level of attainment of additional volumes. These indications of value are then weighted based on the relative likelihood that each scenario may come to pass

This approach could serve as a starting point for discussions with management regarding a contemplated transaction and how to further home in on ascribing a greater degree of empiricism to capturing uncertainty in deriving the conclusion of value.

Understanding the proper way to analyze and account for atypical changes or uncertainty in an appraisal will depend on the specific set of facts and circumstances being faced by the business.  If you are contemplating a business transaction and your business is experiencing change, give us a call.  We are happy to help you understand the value implications of these changes and help you establish a fair market value.

McGuire Woods 13th Annual Healthcare Finance and Growth Conference

Eye Care Investments have been a very attractive niche for healthcare investors with more than 20 private equity placements in 2016 and 2017, and numerous other deals announced or pending during 2018. This investment activity is spurred on by very attractive fundamentals and a highly fragmented market ripe for consolidation. Paired with an ever-increasing regulatory and technological burden, many independent optometrists and ophthalmologists see strategic alignment as a means to refocus their efforts on patient care while gaining the economic benefit of a partial liquidity event.

With the heightened investment activity and media coverage of these deals, it can be difficult to distill fact from fiction. To help shed light on the economic and other variables driving eye care investments, I am very pleased to be participating on the Eye Care Investments panel at McGuire Woods 13th Annual Healthcare Finance and Growth Conference next Tuesday, September 25th. Together with my co-panelists Jose Costa, CEO of For Eyes by GrandVision, and Steven Boyd, Managing Director with Alvarez & Marsal, we will be discussing eye care investments from three distinct perspectives, including:

  • Current Transactional Trends

  • Characteristics of Attractive Investment Opportunities

  • Key Value Drivers and FMV Considerations

  • Eye Care Industry Innovation and Disruption

If you have not already registered for this excellent conference, you can do so by clicking on the following link. If you are unable to attend and would like to learn more about eye care investments, I will be posting a summary of our discussion to my blog following the conference. Hope to see you there!

The Myth of the Healthcare Multiple

BVR’s Online Symposium on Healthcare Valuation

For most, the concept of a valuation multiple is easy for market participants to understand. Unfortunately, this simplicity of concept leads to widespread misapplication of valuation multiples and often results in sellers having unreasonable expectations. In the myth of the multiple, healthcare valuation expert Jason Ruchaber, CFA, ASA, will separate fact from fiction and explore the real financial and compliance considerations that drive FMV and purchase price in healthcare transactions.

2021 BVR – Myth of the Multiple



by Jason Ruchaber, CFA, ASA

In response to the global pandemic caused by the novel coronavirus, Federal and State governments took the unprecedented action of closing large portions of the U.S. economy and issuing stay-at-home orders in an attempt to stem the spread of the disease and “flatten the curve”. These actions led to immediate and widespread economic damage, business closures and high levels of unemployment. And despite several economic stimulus packages designed to support impacted businesses and employees, the coronavirus has created a watershed moment that will fundamentally alter businesses across all industries, including healthcare.

If you or your organization was contemplating an acquisition, merger, joint venture or sale transaction prior to the COVID-19 outbreak, here are some key factors to consider:
1) History may no longer be a predictor of the future
Business values are derived from expectations regarding the future economic benefit that will be derived through ownership. These expectations are often developed as an extrapolation of historical performance, with adjustments made to reflect those changes that are reasonably known or knowable (for example the recent addition of a new payor contract or provider). In the wake of COVID-19, however, the expectation that practice patterns will return to normal once this has all passed may not be the case. With widespread unemployment, many will lose their access to health insurance and due to the loss of income may forego elective and non-emergent visits. In addition, the fear and anxiety created by the pandemic may permanently alter how patients engage with the healthcare system, with many opting to limit their exposure to physician offices and medical facilities through reduced healthcare utilization or through a transition to virtual or home-based care. As a result, pricing models developed with proformas and DCF analysis will need to be revisited and modified.
2) Pricing of risk should be carefully analyzed
In valuation, the term “risk” refers to the likelihood and magnitude that future performance will vary from expectations. Risk is priced in the form of an interest rate, or rate of return, and the corresponding value of a given set of expected cash flows is inversely related to risk (i.e., higher risk = lower value). No one could have predicted the large-scale governmental intervention to shut down the economy, and now that we have seen that this is a reality, investors must account for the possibility that future contagions may result in similar interventions. There is no model that currently prices this risk, but as institutional investors and financial markets process and analyze these new possibilities, the risk and required rates of return on equity investments will most certainly be higher.
3) Valuation Multiples
Valuation multiples observed from transactions prior to COVID-19 are no longer appropriate in the immediate post-COVID environment. Observed valuation multiples from prior transactions reflect the expectations for future financial performance and risk that existed at the time the transaction occurred. For the reasons noted above, these expectations have changed in the wake of coronavirus, and the use of these valuation multiples is no longer a reasonable basis for establishing FMV.
4) Increased debt levels
Equity value is defined as the enterprise value minus debt. In response to the business interruptions caused by the coronavirus, many organizations are funding operating losses by drawing on existing lines of credit, opening new credit facilities, and/or accepting federal stimulus dollars. This additional debt burden has a dollar for dollar reduction on the value of shareholder equity even in the absence of changes to other valuation inputs. As a result, previously valued equity transactions will need to be repriced to account for higher levels of debt.
5) Opportunities and pitfalls
Like all sudden and unforeseen events, the economic impacts of the coronavirus outbreak will create both winners and losers. Whereas reduced expectations for growth in earnings and higher risks will reduce values for many sectors of the healthcare industry, we have already seen a massive increase in investor interest for telehealth technology and platforms, and this will spawn additional opportunities in related ancillary businesses. Beyond the immediate and obvious opportunities, organizations that are able to respond and reposition themselves for the changing care environment may also benefit from these changes. These include alternative care delivery platforms such as care on demand and home-health, retail and drive-through clinics, and concierge medicine. Finally, for organizations that did not have sufficient capital or technological infrastructure prior to the outbreak, or those unable to adapt to new modalities of care, there will be a wave of business failures that will allow well managed and dynamic practices to emerge stronger and enhance their competitive position.
At Root Valuation we are committed to helping clients navigate market and regulatory uncertainties through a consultative approach to valuation services. If your organization needs help navigating a business transaction or help understanding how these changes may have impacted your organization’s value, please give us a call at 720.390.6673 or email us at