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Impact of Ownership Details for Capital Equipment Appraisals

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Impact of Ownership Details for Capital Equipment Appraisals

A commonly observed challenge with capital equipment appraisals in the physician practice setting relates to establishing the ownership of equipment. Since fixed asset lists are often unreliable or incomplete, a site visit is often required to ensure a thorough recording of all assets to be included in the valuation. Reliance on lists developed based on assets observed during a site visit may bring rise to complications related to the following types of equipment ownership:

Operating Leases

The assets held under an operating lease are owned by the leasing company and should not be included in a capital equipment appraisal. In these instances, an appraiser would need confirmation of these operating leased assets from knowledgeable personnel. Common examples of operating lease equipment include copiers, credit card machines, printers, telephone systems, and postage machines. We have also observed, in certain circumstances, medical equipment under an operating lease, with such equipment including ultrasound and magnetic resonance imaging systems.Microscope Semi-close.jpg

Leasehold Improvements

These assets relate to certain real estate improvements which are made to a leased location at the expense of the practice. Fair market value is often dependent on the lease term and renewals, since these assets are typically affixed to the real property, and therefore, are not readily able to be uninstalled or sold for future use. It should be noted that regardless of their value, not all acquirers agree to pay for leasehold improvements, especially when potential relocation of the practice is planned. Common examples of leasehold improvements include interior fit out, built-in desks and cabinets, and signage.

Un-owned Assets Placed For Use

We have observed, particularly with laboratory companies, the placement of un-owned equipment on-site for usage by the practice. This is a form of rental arrangement whereby, in the case of laboratory equipment, the practice is obliged to pay for reagents or clinical tests from the laboratory company. Similar to operating lease assets, this equipment is not owned by the practice and should not be included in a fixed asset appraisal. Common examples of equipment we have observed that are under this type of an arrangement include chemical analyzers and centrifuges.

FMV Pitfall

The valuation of capital equipment can potentially produce widely divergent and inflated results if certain ownership details are not disclosed while performing the valuation. Operating leases and “un-owned” assets placed for use are common examples of assets that can incorrectly find their way into an initial appraisal. To ensure appropriate treatment of these assets, practice personnel must provide confirmation and identification of these assets so the appraisers can appropriately exclude these assets from the valuation analysis. Acquirers of physician practices should be aware of these potential issues and can facilitate the process by working with practice representatives and appraisers to ensure appropriate understanding and communication regarding the appraisal process.