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The intangible asset referred to as personal goodwill is a critical component of your dental practice’s value. This form of asset is often misunderstood, and the legal precedents bearing on personal goodwill are not always easy to interpret. Dental practice owners need to familiarize themselves with how personal goodwill is perceived from both a legal and tax perspective in order to maximize their practice’s market value and reduce tax liability.
Goodwill can be defined as all of the intangible factors which motivate patients to keep coming to your dental practice. These factors include your perceived professional competence, personal reputation, and specialization. These qualities actually constitute up to 80% of your practice’s value, so it is absolutely essential that you understand how personal goodwill is calculated and how to leverage them in your favor.
Perhaps the most important legal case bearing on goodwill — Norwalk v. Commissioner — ruled that goodwill is a personal asset, not a corporate one. This allows for personal goodwill to be carried off the corporate balance sheet. In most cases, a doctor must be free of a non-compete covenant in order to maintain this separation of goodwill from the corporation’s assets, so doctors should avoid entering into such an agreement when possible.
The information provided in this article, as well as other parts of this website, is not a substitute for legal or tax advice from a duly-licensed attorney or tax professional. Tax planning for a dental practice transition can be complicated and we recommend that you visit with an experienced and licensed professional.