The Three P’s of Valuing Healthcare Machinery and Equipment

Healthcare machinery and equipment (M&E) change hands daily across the country through larger business transactions or as individual assets or groups of assets being bought and sold. M&E values can impact the viability of the transaction or the parties’ compliance with complex laws governing the deal. Below are easy-to-remember tips on the Purpose, Process, and Pitfalls of M&E appraisals.

Purpose

Why are M&E appraisals useful?

• For setting transaction price

Asset valuation plays a role in determining the price in a transaction. This is not only important in assigning value to assets that make up the deal; a solid valuation results in a comprehensive inventory and identification of items that should not be part of the transaction, including personal, obsolete, or leased assets.

• For legal compliance 

The Stark law and the federal anti-kickback statute provide for exceptions and safe harbors, respectively, to protect certain transactions, and many of these rely in part on fair market value (FMV). Determining FMV in accordance with applicable standards of value is essential for compliance with these and other complex healthcare laws and regulations. Tax-exempt organizations must also abide by IRS definitions of FMV.

• For financial reporting

Assets are an integral part of financial reporting and management. Inaccurate asset balances and depreciation can misstate financials and potentially mislead stakeholders. If a transaction requires purchase price allocation, accuracy in valuing tangible assets bears significance as a component of the purchase price.

• In special circumstances

Asset valuation is important in bankruptcy proceedings, corporate dissolutions, and capital and operating credit financing transactions.

Process

Once a valuation team is engaged, what can you expect?

• Define the engagement

The first step in engaging an M&E appraiser is to define the project scope. An appraiser should provide a clear, written explanation of the process, deliverables, and applicable FMV definitions. Engagement timing and price are best set forth in writing at the beginning of the project.

• Collect the data

The appraiser will often begin by requesting an equipment listing that includes manufacturer, model, and serial number. Special features of high-end equipment—the “bells and whistles” that may affect value—will also be requested. During the all-important site visit, appraisers seek the help of someone knowledgeable about the assets and ask to see and photograph most items, noting condition and date of manufacture.

• Determine the value

The appraisal analysis is most often determined through application of the cost and sales comparison approaches. The cost approach is based on the cost to replace an item of equipment with an item of “similar or identical utility,” considering depreciation and obsolescence. The sales comparison approach uses data from the marketplace and manufacturers about comparable equipment, adjusted for any differences in characteristics of the market comparables.

• Conclusion

The appraiser synthesizes and reconciles the indications of the above methods to reach final conclusions.

• Report

The project culminates with a report that presents the facts, valuation methods, and conclusions.

Pitfalls

As in any precise undertaking, valuation has some pitfalls.

• Be sure to consider leased equipment.

All equipment should be identified, including leased equipment, which can be easily overlooked. A copy of the lease is requested to help the appraiser understand whether it can be transferred to another lessee.

• Don’t rely too heavily on the depreciation detail.

The depreciation schedule may be a good place to start, but it often contains disposed equipment or highly summarized asset groups. Fully depreciated equipment for tax purposes may still have economic value for purposes of a transaction between willing buyer and seller.

• Appraisers prefer comparing apples to apples.

It’s important when appraisers are using a sales comparison approach that they are comparing truly comparable items. For example, the magnetic field strength of an MRI can make a big difference in the value of the equipment. It sometimes takes detective work, but translates into a much more accurate valuation.

The take-away: remember the three P’s when working with an M&E appraiser. Those who have obtained credentials in this field understand the intricate laws and regulations particular to the healthcare industry, maintain a unique skill set, and are highly trained in this specialized field.

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