One of the most valuable and yet intangible aspects of any business is goodwill. While goodwill is an important component of all medical, dental and veterinary practices, it can be difficult to attribute a dollar value to. Generally, the value of goodwill is ascertained by the purchaser at the time a practice is being sold. However, there’s another situation when practice owners can use the value of goodwill which is when they are wanting to expand their practice. Their existing practice’s goodwill could secure the finance needed to purchase another practice.
Goodwill is invisible but very real. It’s the value of a business excluding all of the assets and equipment.
“When dealing with a medical, dental or veterinary practice, goodwill is tightly related to the patients,” says BOQ Specialist’s Darren Tomlinson. “Whether they’re individuals or animals that are coming into the practice, it’s about the service that's being provided by the practitioners via their skills and education. Goodwill grows with the reputation of both the practice and the practitioners. Sometimes it's relatively organic. A practice may start with low patient numbers, but as it develops its reputation, the patient levels increase and in turn, the goodwill value increases.”
When dealing with the purchase, sale or expansion of a practice, banks place a dollar value on goodwill. This value can be based on turnover which is directly linked to the patients and the treatments that have been provided. It's also based on the growth of the practice and how it’s performed year on year. Banks will also look at how the practice is doing in the scheme of the economy. If the curve's going up—if it's growing—then the goodwill potential is healthy and valuable.
A practice that's been around for 20 to 30 years will have a high value in terms of goodwill, but longevity is not a necessity. Goodwill can also be based on how well a practice has been performing over a shorter period of time. Important markers are adaptation to the market, use of technology to help their patients, and how nimble the practice is in a changing business landscape.
When a practice is ready to expand, utilising existing goodwill can be an effective way to finance it. The goodwill that's been built up over a period of time by the team and the individuals providing the service is a valuable asset. It has added equity to the existing practice.
“There’s a real dollar figure value of goodwill in a practice,” says Darren. “This equity can be used as security to set up the additional sites instead of using a tangible asset such as a home. Rather than drawing against the value of your home, you can use your goodwill to have the bank provide funding for the expansion.”
The relationship the bank has with the practice and the practitioner will certainly aid the process. The bank can establish how the practice has grown, the achievement of a certain level of billings, and the level of patient numbers. Looking at the history of the practice and the development of a patient base is also a good indicator of whether the time is right for expansion.
Goodwill is all about reputation and that’s influenced by the rationale behind a practice.
“We'll often see a new moderately sized practice grow their business and increase their goodwill,” says Darren. “The owner will then use that goodwill to set up at another site, utilising their successful business ethos to establish and grow at that location. This can eventually develop into a couple of locations.”
One of the most difficult and challenging undertakings is to start a practice from scratch. Transforming an empty shell into a modern practice is a costly enterprise and patient numbers have to be built from zero. As the practice grows due to hard work, performance and satisfied clients, patient numbers increase so the reputation develops and goodwill becomes a significant asset.
When a bank can see the practice is performing well and has built its patient numbers, the true value of goodwill becomes evident. It’s the reputation of the practice and the individuals who work there that have really helped to increase the value.
“The key to building goodwill is being aware of what your patients need and what they are requesting,” says Darren. “Satisfying their needs will help to develop the goodwill of your practice. While this all ties in with patient numbers and income, the way the market sees you will definitely help towards increasing the value of your practice and your goodwill.”
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.
