Goodwill Explained
Contributed by Luke Truscott, Senior Finance Specialist BOQ Specialists
I asked Luke to provide the lenders’ views on how Goodwill is calculated as part of the lending criteria when borrowing for a dental practice purchase.
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 dentist what’s valuable about their practice; 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 value goodwill and try to determine a cash value for it. Goodwill is the value of your practice, excluding the property, equipment, and other physical assets.
Goodwill is an intangible asset, unlike a property or piece of equipment, and represents the reputation of the business and brand you have created, including consistent good service and strong employee relations. Goodwill is made up of the established number of patients and the products and services you offer. It also includes all those non-physical assets that belong to the 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.
There are three general steps a practice owner can take to build goodwill as an asset. Firstly, provide consistently exceptional client service and build an ongoing relationship with your patients—this is easy to do as it is something all practices aspire to anyway.
This will build advocacy for your practice through word of mouth and referrals. Invest in marketing and patient management/retention to build your database 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 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 besides their qualification,” says BOQ Specialist’s finance consultant Michelle O’Connor. “The hard work is getting their practice 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.”
AHEAD: 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. It would help if you looked at the value placed on the services offered to those patients and the value your patients place on them. In short, it isn’t very easy.
One of the other complicating factors in valuing goodwill is who buys 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 some time. If an independent practitioner buys the practice, it could be sold without 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 if the buyer is already working in the practice, as they have probably already built up their own patient base. We have 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 Specialists comes into play. They have decades of specialist experience in the dental profession, so they understand how practices work and where the real value lies.
So, if you’re thinking about taking the next step in practice ownership, speak to Luke of BOQ Specialist’s local finance consultants at 61 414 228 377 or email luke.Truscott@boqspecialist.com.auto to find out how we can tailor a finance solution for you.
Disclaimer:
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 license no. 244616 (“BOQ Specialist”). Terms, conditions, fees, charges, eligibility, and lending criteria apply. Any information is of a general nature only. We have not considered 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.
