Goodwill explained
By growing, investing in, and managing your practice, you’re inherently building goodwill, but what is goodwill and what else could you be doing to increase the value of your practice?
Learn MoreIntangible assets such as goodwill can be just what you need to buy into a successful private practice.
Are you planning to take the next step in your professional career and buy into a practice? If so, understanding and valuing the goodwill component is a critical step.
“Goodwill enables someone to buy a share in a practice or to buy a practice outright,” explains Ursula Coetzee, Senior Finance Consultant from BOQ Specialist. She says that many medical, dental and veterinary professionals prefer to buy into an existing practice as it can be less risky than establishing a new clinic. This is because it usually comes with established infrastructure and a secure client base.
“The opportunity to buy into an existing practice commonly arises when the current owner is looking to transition into retirement and they want to start cutting back," she adds. "Or, they want to have someone to share in the risk and to grow the practice with so they release some of their shares in the practice. This may be to someone who has already been working in the practice, or it may be to someone completely new who is interested in practice ownership.”
“If someone leaves a practice, goodwill enables other practitioners to buy a share in that practice and have some form of ownership. This will give them the chance to have some say in how the business is managed and also share in the profits of the practice.”
Why value goodwill?
Valuing your business can be an important part of securing finance, as well as when you are buying or selling a practice. Health professionals rely on both their reputation and the connection with clients to create value.
This translates as goodwill, an intangible asset, which can’t be touched or counted, unlike a tangible asset such as stock on hand. Goodwill is the value of a business, excluding the equipment and the assets. It can be difficult to see and value, but patient numbers and activity, as well as financial indicators such as revenue, expenses and profit, all play a part.
How to calculate the value of goodwill
“At BOQ Specialist, we use a combination of EBITDA, which is earnings before interest, taxes, depreciation, and amortization, as well as net profit to measure the value of a practice”, says Ursula. “It is really important for anybody wanting to buy into a practice to get an experienced accountant to help them assess the value of the business. This will help ensure you are not over paying. Conversely, if the practice is selling too cheaply you may also need to understand why.”
“It's important to make sure that you use an accountant that understands how medical, dental and veterinary practices work,” she says. “How to calculate the value is obviously different to other businesses such as retail entities.”
She also points out that some of the goodwill is bound to be lost during the transition to new ownership, which can be a trap for the unwary. Long-term patients might use the opportunity to try new practitioners, which could result in a loss of some clients and the value of the practice.
What to avoid
Ursula says that much of the value of a practice’s goodwill is based on the reputation of the existing owner. Given this, she suggests it is a good idea to have the original practitioner stay on for at least a six to 12 month period, to help with the transition.
She also recommends that potential buyers include a non-compete clause. This protects you in case the current owner has second thoughts about either selling or retiring and decides to set up a clinic close by, which could erode your patient base.
“A non-compete clause protects the practitioner and the bank,” Ursula adds. “The goodwill is only as good as the patients that stay with the practice.”
Understanding the business
When considering buying into an existing practice, it’s essential to do your research into the current procedures and services offered by that practice. This will influence the success of the practice and in turn, the value of the goodwill. Goodwill could be eroded if you aren’t interested in providing the same procedures and services.
Ursula adds, “The converse also holds true. If you offer additional procedures and services that you do not need to refer out, you may increase the profitability and attract new patients to the practice.”
Staffing levels
Staffing levels in a practice are also important, adds Ursula. “It's very important to understand whether the practice is staffed correctly. Sometimes, you might find that practices are overstaffed or they may be understaffed,” she says.
“It’s also good to take the time to ascertain what the existing staff may be planning to do in the future. For example, a medical receptionist with 20 years’ experience might use a change in ownership as a chance to retire, which can also hurt the existing customer base and disrupt continuity. Similarly, the loss of any other practitioners might downgrade the value of a practice.”
When it comes to taking that next step in your professional career and becoming a practice owner, understanding the goodwill component of an existing practice and the factors that can impact its value are critical. Not only will this help you to secure the finance required to make your purchase, it will also ensure you continue to run the practice successfully and build its goodwill even further.
So, if you’re thinking about taking the next step in practice ownership, speak to one of our local finance specialist on 1300 160 160 or to learn more, take a look at our practice purchase loans to find out how we can tailor a finance solution for you.
