The Goodwill of Business Owners
What is Goodwill?
Every business owner and every professional in private practice owns a valuable and intangible asset called goodwill. It is an accounting term that places a dollar value on a business enterprise over and above the value of its tangible assets. For example, if you receive an offer of $300,000 for your practice and the tangible assets are only worth $75,000, then the balance of $225,000 is considered goodwill.
Another practical definition of goodwill is the likelihood that, on any given day, clients or patients will 1) call upon your practice and 2) be in a position to pay the set fees. The courts, economists, and accountants all recognize the importance of goodwill. You will want to set a monetary value on a practice’s goodwill if you are party to a divorce proceeding, planning your estate, or if you intend to buy or sell either an entire practice or a partnership share.
The goodwill that any business enjoys has to be generated anew continually. Regardless of your situation, you too should keep this in mind and take steps to nurture and manage the goodwill of your practice.
Where Goodwill Comes From
If you start a practice from scratch, a strong clientele or patient base will take years to build. If you purchase an existing practice, you have to pay dearly for its clientele. There are customs that alleviate the huge burden of paying for goodwill. It is customary for the seller of a practice to assist the buyer with financing, usually by accepting a personally guaranteed note that is paid with income the practice generates after it is sold.
An informal custom is that a professional becomes a partner once the existing partners recognize the substantial
amount of goodwill that their employee has created. The value of the employee’s goodwill is then transformed into his share of ownership as a new partner in the practice. If the current owner does not recognize this added value in due time, the professional sometimes walks away with a fair percentage of the clientele (goodwill) of his former boss.
Your ability to create and maintain unique relationships will either enhance or hamper your prospects for growth.
Building special relationships with the individuals to whom you render your services is a key method of creating goodwill.
You can also accelerate the creation of goodwill by networking with professionals in unrelated fields in addition to networking with those in your line of work.
Key traits of
successful leaders
Covenants not to Compete
Shareholder Agreements
Employment Agreements
Putting a price tag on your practice
Physician Resources
Create a Specialty or a Niche Market
How to Generate Goodwill
Targeting a distinct market is one way of speeding your practice on its way to success. Catering your services to a niche market puts you at an advantage over other practices that deliver the same service. Niche marketing attracts and selects the most desirable candidates for a specialty service. The specialty service need not be related to your profession. As examples, a business can be marketed and geared to serve the elderly, residents of a town, the Spanish-speaking, or professionals in private practice.
A specialty service will help your practice stand out as unique among others and it also reduces the effect of competitive forces working against you. Depending on the demographics of your niche market, you may be able to charge a premium for your services. Patience and perseverance play an important role in creating goodwill because it happens slowly and almost imperceptibly over a long period of time.
If you have been in practice for a long time, chances are that the value of your goodwill is considerable. And it is directly linked to business revenue. The more revenues you generate, the more goodwill you have and the more dollars you and your practice will command in the marketplace.
Copyright, Gary Gauthier, Harvard Law School, '89