How Goodwill Affects the Sale of a Medical Practice
When selling your medical practice, it’s important to understand how goodwill factors into the transaction and how it can impact the sale. While a significant portion of the sale proceeds may end up with the IRS, allocating a portion of the proceeds to personal goodwill can potentially result in tax savings.
Understanding goodwill
The IRS defines goodwill as the value of a business that is tied to expected continued customer loyalty, which often correlates with factors such as reputation and brand name. But what does goodwill mean when it comes to your medical practice? This can vary as it can be classified as either personal or enterprise goodwill. Nonetheless, at its core, goodwill is meant to financially represent the energy, time, and effort you’ve expended in establishing and growing your medical practice.
To view it from a broader perspective, the value of your medical practice and its associated goodwill isn’t merely about the physical items you can touch and see, like your medical and office supplies, or your tangible assets, such as office furniture and medical equipment. It’s essential to consider the intangible assets that your practice possesses. These include your professional reputation, your practice’s brand, your established patient base, the healthcare providers who work with you, and your network of referring physicians.
Critical to the sale price
Goodwill plays a substantial role in the sale price of a medical practice. It is often the most significant component alongside other factors like trade secrets, patents, copyrights, and trademarks. The allocation of goodwill in the sale price depends on the dollar amount attributed to it, and calculating goodwill involves multiple variables, often referred to as a “blue sky calculation.”
What’s involved in calculating goodwill?
To accurately determine the goodwill value of your medical practice, it is advisable to consult a valuation expert specializing in medical practices. They can help assess the intangible value of your practice and determine its true market value or what buyers are willing to pay.
Tax implications
Tax implications related to goodwill allocation should be carefully considered and discussed between the seller and buyer. It is essential to seek advice from a medical practice valuation expert or an accountant to identify any personal tax implications and evaluate the financial standing of the practice.
Tangible assets tend to depreciate over time, typically within five to seven years, while the goodwill value of a medical practice amortizes over 15 years. Sellers may prefer to reduce the allocation of the purchase price to tangible assets to minimize taxes at ordinary income rates and maximize the capital gain associated with goodwill.
Negotiations are welcome
Goodwill can also be a negotiation point during the sale of a medical practice. Both buyers and sellers aim for a mutually beneficial price, and discussions on goodwill allocation can play a role in reaching an agreement that satisfies both parties.
Do you know the value of your practice?
If you need assistance in understanding and evaluating the goodwill value of your medical practice, Strategic Medical Brokers can provide valuation services to help you navigate the process. They specialize in finding the best price when buying or selling a medical practice.
Determining the actual worth of your practice is not just about numerical evaluations—it involves comprehending its potential, its standing in the market, and its distinctive qualities. Strategic Medical Brokers conducts thorough practice valuations, considering various elements such as financial performance, market trends, and prospective growth possibilities. They offer more than just a ballpark figure. They also provide you with a strategic understanding of your practice’s worth, thereby readying you for a fruitful changeover.
Request a medical practice valuation on their website or contact them at 888-970-1210 for further information.
