The Value of Goodwill

Every viable dental practice has goodwill. Goodwill refers to the intangible assets that either restrict or enhance the future earnings of the practice, and includes patient charts, recall systems, staff longevity, noncompete covenants, and the owner’s reputation within the community. Goodwill typically accounts for 60% to 80% of the practice’s total value. For both buyers and sellers, protecting the practice’s goodwill is critical throughout the entire transition process.

Dentists can purchase new furnishings and equipment (i.e., tangible assets); however, buyers cannot immediately duplicate existing relationships of trust that a seller has developed with the patients, staff, and community (i.e., goodwill). These relationships and the doctor’s reputation ensure much of the revenue stream in a practice. Historically, goodwill remains with the practice after the seller leaves. The majority of patients are willing to transfer their loyalty and trust to the new buyer after receiving an endorsement from the seller.

Because goodwill comprises the majority of a practice’s value, it is imperative that all parties protect it throughout the transition process. Transitions usually fall apart if goodwill is damaged. Imagine a new car that has sustained substantial hail damage. This vehicle runs smoothly and the entire interior is in perfect condition; nonetheless, the vehicle is blemished and has lost significant value. The same applies to a dental practice with damaged goodwill. All of the tangible assets may be intact, but damaging the goodwill will affect its earning potential and value.

From submitting an offer to closing the transaction and beyond, buyers and sellers should take the following steps to avoid pitfalls that damage goodwill:

No. 1

Hire experienced professionals. Both parties should hire competent advisors, such as a broker, accountant, and attorney who have experience with dental practice transitions. These professionals should safeguard each party’s interests while negotiating in a spirit of professionalism and cooperation. The buyer and seller should keep their professional team focused on each party’s priorities and refrain from making countless modifications and unreasonable or unnecessary requests.

No. 2

Avoid direct negotiations. An advisor acts as an intermediary who can remove emotion and provide a buffer between the parties. By employing a broker or attorney to negotiate on your behalf, parties can discuss contested terms of the sale without creating undue tension and damaging the buyer-seller relationship.

For example, negotiation of the sales price can be hotly contested. The seller may take offense if the buyer offers less than the asking price. No matter how well the parties see eye to eye on other terms, the lower offer can damage the goodwill. Consider the net effect of the lower offer and the effect on the seller’s opinion of the buyer. If the buyer believes a lower price is justified, a thorough explanation should be provided.

No. 3

Never undermine or disparage the seller.The buyer’s practice philosophy and management style might differ from the seller’s, but instead of criticizing the former practice owner to employees or patients, the buyer should quietly implement any necessary changes. For example, the buyer may disagree with the seller’s treatment planning or clinical work for a patient. The buyer should explain his or her concern and provide a solution to the patient, but do so without disparaging the seller. It is the buyer’s goal to build trust and loyalty with the patients and staff. Disparaging the seller will invite confusion and distrust within the practice.

Goodwill is the single most important asset of a practice. Preservation of goodwill is tantamount to ensuring ongoing success.

Frank Brown, JD, LLM, is a tax attorney and accountant who limits his practice to practice transitions. Mr. Brown has helped dentists with sales and appraisals since 1990. Reach him at 469-222-3200 or 888-419-5590, ext. 469, or frank@watsonbrownsales.com.