Purchase and Sale - Seventh Post

Goodwill

Thus far, we have been discussing a number of concepts and factors affecting the value of goodwill. In most cases, it comprises most of the eventual price so it is extremely important that both vendor and purchaser understand what type of goodwill has value. There are two types of goodwill: Commercial and personal. Because of the nature of professional practice, they often overlap and make valuation difficult.

Commercial goodwill is the goodwill which has value and can be sold or transferred to other parties. It represents the perceived benefit to prospective purchasers of getting into practice with an established office, existing patient base, staff and premises. It's value is in direct proportion to the ability to maintain the earning capacity of the practice.

Personal goodwill has little or no value and is not transferable or saleable. It represents the personal skills, techniques, experience and contacts of the individual chiropractor. The degree to which these factors cannot be emulated by a prospective purchaser will affect the ability to sell the practice. A typical example would be where a chiropractor practices a unique procedure that no one else does, including prospective purchasers. If this procedure is the only source of revenue, the practice will have no value for goodwill.

In looking at the conceptual framework for determining the value of a practice, a prospective vendor should be more aware of what factors determine that value and therefore implement changes to their practice to improve its ultimate liquidity and sale price. Prospective purchasers should have a better understanding of what elements to look for in a practice in order to find the right practice for the right price.


AMF: For both the Purchaser and the Vendor it is important to keep in mind the bottom line B how much is being paid and how much can be retained after the payment of debts, including taxes.

The Purchaser must remain concerned about the ability of the "asset" being able to generate the income which has been represented to have existed at closing by the Vendor. Was there "value" to the "asset". All things being equal, the Aasset@ should be able to provide income which has been anticipated by the Purchaser to be derived by the practice after closing.

Empirically and by anecdotal discussion with purchasers, there is no reason why the billings generate previously by a practice cannot be maintained by the purchaser with a "drop off" rate of no more than 15%. The drop in patient income after closing should be able to be maintained at an amount not less than 10%. In order to accomplish this fact, the Purchaser must be in a position to maintain the "goodwill" after closing as it had been maintained prior to the transfer of the practice. The status quo is the most vital part of a practice in that the less that is changed the better. There is a sense of security for a patient who attends an office and is able to be assured that things will remain the same in terms of staff, location, treatment technique, billings and other office protocols.

There is danger to making any immediate changes to the practice which will cause a patient to question whether the "office" has changed to an extent whereby the patient is content to seek care elsewhere. This includes the addition or replacement of equipment or furniture.

There will always be some "drop off" by patients who are members of the Vendor's immediate family or for some reason may have a relationship with the Vendor which will result in the patient remaining with the Vendor after closing notwithstanding the non-competition and non-solicitation provision. The Purchaser should recognize that these patients exist and should ascertain from the Vendor the extent of the list and how it will affect the future income of the practice.

A practitioner should keep in mind that as long as there is a purchaser willing to pay for that portion of a chiropractic practice which exceeds the actual value of furniture, equipment and leasehold improvements (whether that value is established by replacement cost, undepreciated value or actual cost) goodwill will continue to be an asset which can be created, maintained, bought and sold.