The Importance of Goodwill in Medical Practice Valuation

Every thriving medical practice has goodwill. This critical element refers to the intangible assets that influence the future earnings of the practice, encapsulating elements such as patient charts, recall systems, staff longevity, noncompete covenants, and the owner’s reputation within the community. In many cases, goodwill makes up 60% to 80% of the total value of the practice. Hence, understanding and preserving practice goodwill values is crucial throughout the entire transition process for both buyers and sellers.

What is goodwill?

Goodwill is the part of the purchase price that exceeds the sum of the net fair value of all acquired assets and assumed liabilities. In the context of medical practice goodwill values, the intangibles that contribute to goodwill include:

  • A favorable location
  • Going concern value
  • Use of the seller’s name
  • Favorable leasehold
  • Covenant not to compete
  • Compensation for managerial and entrepreneurial services
  • Patient lists
  • Credit records
  • Patient care contracts
  • Employee contracts

An accurate evaluation of  practice goodwill values should be detailed in a report—including calculations over a 10-year period—to offer a comprehensive snapshot of the practice’s true worth. This evaluation also illustrates why and how value is achieved, aiding buyers in recognizing the continued cash flow potential from patient retention and growth due to an established reputation.

Why is goodwill important?

Goodwill encompasses the relationships and trust a seller has fostered with patients, staff, and the community. These bonds assure much of the revenue stream in a practice. After all, most patients are willing to transfer their loyalty to a new buyer, especially with the seller’s endorsement. However, like a new car losing significant value due to hail damage, a medical practice can lose value if goodwill is harmed, even if all tangible assets are intact.

How can you protect goodwill during a valuation?

During the process of submitting an offer, closing the deal, and even beyond, buyers and sellers must adhere to the following guidelines to prevent damaging the practice goodwill values:

  • Engage skilled experts – It’s crucial for both parties to seek the expertise of qualified professionals like brokers, accountants, and attorneys who specialize in medical practice transitions. These experts must protect the interests of both buyer and seller, fostering a collaborative negotiation.
  • Avoid direct negotiations – Utilizing an advisor as a go-between helps eliminate personal emotions and serves as a cushion between the conflicting interests of the buyer and seller. Engaging a broker or attorney to represent you allows the discussion of disputed sale terms without straining the relationship between buyer and seller.

For instance, disagreements over the sales price can be contentious. If a buyer offers less than the seller’s asking price, it might lead to resentment and hurt the goodwill, even if other terms are agreeable. Careful consideration of the broader impact of a lower offer (along with clear justification if needed) can mitigate this risk.

  • Avoid criticizing the seller – While the buyer’s approach to practice management may differ from the seller’s, it is vital not to publicly criticize or belittle the former owner. Should the buyer disagree with aspects such as treatment planning or patient care, they should address the issue privately and constructively. Open criticism can only create confusion and erode trust among patients and staff. The buyer should focus on building trust and loyalty, recognizing that undermining the seller will only sow discord within the practice.

We can help

Are you looking to buy or sell a medical practice? Ensuring accurate valuation and safeguarding goodwill is vital to your success. Strategic Medical Brokers are experts in practice goodwill values, offering comprehensive evaluation and transition services. Trust our experienced team to guide you smoothly through the process, preserving the crucial goodwill that defines your practice’s value.

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