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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?

Ask any doctor, dentist or vet what’s valuable about their practice and the first things that will spring to mind are intangible. After all, if you’ve spent years building a practice that your patients and employees love coming to, that goodwill is far more valuable than the sum of all the equipment and assets you’ve acquired over time. Goodwill is at the core of well-established practices, but how do you build it and how can you put a cash value on it?

Finance providers certainly value goodwill and do try to determine a cash value for it. Goodwill is the value of your business or practice, excluding the property, equipment and other physical assets. Goodwill is made up of the established number of patients, as well as the products and the services you offer.  It also includes all those non-physical assets that belong to a practice such as the practice's IP information, phone numbers, websites, and so on. The value put on goodwill can also vary depending on the industry, and the size of the practice.

Goodwill is an intangible asset, unlike a property or piece of equipment, and represents the reputation of the business. It encompasses the name of the business i.e. the brand you have created, patient numbers (both new and repeat business), consistent good service and strong employee relations.

There are three general steps a practice owner can take to build goodwill as an asset. Firstly, provide a consistently exceptional client service and build an ongoing relationship with your patients—this is an easy one to do as it is something all practices aspire to anyway. This will build advocacy for your practice through word of mouth and referrals. Secondly, invest in marketing and patient management/retention to build up your data base and attract new patients. This will support the advocacy generated from delivering great experiences. And thirdly, hire the right staff to look after your patients. Having the right team makes patients feel at ease and make them feel cared for. Those three steps will have the largest impact on building goodwill.

 “A number of our medical and dental clients started out with nothing aside from their qualification,” says BOQ Specialist’s finance consultant Michelle O’Connor. “The hard work is getting their practice going and building goodwill. That's why when a vendor is looking to sell, you will often hear that they're selling what they've built up over 25 or 30 years.”

Goodwill hunting

Building goodwill takes time and effort, and is unique to each individual practice. That’s why goodwill isn’t only valued on your active patient numbers. You must look at the value placed on the services offered to those patients and the value your patients place on them. In short, it’s complicated.

One of the other complicating factors in valuing goodwill is who is buying the practice. If a practice sells to a corporate group, other conditions may affect the sale price. These might include ongoing performance, and the current owner staying on for a period of time. If an independent practitioner buys the practice, it could be sold with no conditions for the current owner to stay on.

“Let’s say the buyer already works in that practice as an associate,” Michelle O’Connor explains. “The current owner is looking to retire, and they’ve worked out a succession plan. The price may differ because if the buyer is already working in the practice, as they have probably already built up their own patient base. We have some benchmark numbers of where we estimate it is placed and look back on historical sales to help value the practice. Credit officers in banks also have access to that kind of information.”

This is where the deep industry knowledge of BOQ Specialist comes in to play. They have decades of specialist experience in the medical, dental and veterinary professions so they understand not only how practices work, but also where the real value lies.

A deeper understanding

That specialist understanding means BOQ Specialist can also adapt to individual circumstances. For example, an owner wanting to transition into retirement doesn’t need to sell their entire practice. Instead, a percentage of the practice can be sold to a partner working with them, who will start with a 25% or 50% share of ownership. The original owner then stays on as a shareholder and retains a percentage which may aid in their transition into retirement. From a financier’s point of view, this can support the finance application as the original owner is still involved, there is marginal risk in the value of the practice decreasing because they are still a part and the practice and have not simply left. The goodwill in that case has a clear value.

That benefits the buyer as well. When buying into an established practice, BOQ Specialist can consider the value of the practice and provide funding secured by the practice, without using a home or other residential properties as security over the loan. That’s based on BOQ Specialist’s 30 years of experience and thorough understanding of the value of practices.

 

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.

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  • Important Information

      The issuer and credit provider of these products and services is BOQ Specialist – a division of Bank of Queensland Limited ABN 32 009 656 740 AFSL and Australian credit licence no. 244616 (“BOQ Specialist”). Terms, conditions, fees, charges, eligibility and lending criteria apply. Any information is of a general nature only. We have not taken into account your objectives, financial situation, or needs when preparing it. Before acting on this information, you should consider if it is appropriate for your situation. BOQ Specialist is not offering financial, tax or legal advice. You should obtain independent financial, tax and legal advice as appropriate.