The Practice Manager's Guide to Buying a Practice - McMasters ...

Accountants define goodwill as the excess of the market value of a practice over the sum of thevalues of the individual tangible assets, such as office equipment that are used in that practice. Thisis a conventional and technically correct definition. The market value of a practice will only begreater than the sum of the value of the individual tangible assets used in that practice whenpractice profits are higher than the amount the prospective purchaser can earn as a non ownerdoctor.Case law identifies three types of goodwill. They are:Personal goodwill, i.e. goodwill that is attached to a particular doctor because of his/herpersonal manner/personality, medical knowledge, clinical experience, and patient loyalty. Thereis an interesting technical question as to whether personal goodwill can be transferred toanother person. The general view is that it cannot, although strategies can be devised to ensurethat over time a doctor buying personal goodwill ultimately receives the benefits. This isparticularly the case in some specialist practices, especially specialist dental practices. Thisoccurs when the vendor specialist uses their best efforts to ensure the benefit of referralarrangements with GPs and passes it on to the purchaser doctor;Location goodwill. Some sites are more likely to generate higher patient attendances thanothers. Generally these will be sites with high traffic, high visibility, ample parking (preferablynot paid for by the practice: an example is a practice next door to a large shopping centre wherepatients can use the shopping centre car park), and the right aesthetic/professionalpresentation. Such locations are likely to generate high patient numbers. Security of tenure isthe critical issue when buying such a practice. It is a good idea to either buy the premises as well,or make sure there is a very safe and long term lease. This then raises the question as towhether the goodwill belongs to the practice or the premises. It is a good question, and we thinkit belongs to the premises, unless there is a very good long term lease in place; andName goodwill. Some practices have stronger reputations than others. Name goodwill is likelyto exist in a group practice situation where the purchaser immediately enjoys the benefit of thepractice’s reputation, as built up over many years, and the continuing professional relationshipwith the vendor doctors.In each case the amount of the goodwill depends on the size of the maintainable profits above thenormal return for a doctor. Therefore, if the profit is only around $300,000 there will be no goodwill,no matter what the reputation of the vendor doctor is, (i.e. there is no personal goodwill), no matterwhat the location is, (i.e. there is no location goodwill), and no matter what the reputation of thegroup practice is, (i.e. there is no name goodwill). Further information on the types of goodwill isavailable at appendix 3 at the end of this guide.The Importance of GoodwillIt is important to understand the relationship between a practice's maintainable profit and apractice's goodwill. As profit increases and begins to exceed the amount a doctor could earn workingsimilar hours as a non-owner, practice goodwill is created.A practice that yields a maintainable net profit per principal of $300,000 a year will not have muchgoodwill. This is because $300,000 a year does not exceed the amount most prospective ownerdoctors could otherwise earn as employees, or at least as assistants or consultants. A practice that13