What is the “Goodwill ” of a dental practice?
You will hear this term any time you are talking about buying (or selling) a dental practice. Most of us have a sense of what that means, but a better understanding of Goodwill will make your chances of success much greater.
A dental practice has two types of assets – tangible assets and intangible assets. Tangible assets, as the name implies, consist of all the things you can see and feel – the dental operatories, the digital x-ray, the hand pieces, the computers, the office equipment, the desks, the chairs, the waiting room furniture – and anything else that might be used in any particular office.
While any value assigned to these assets is subjective, an experienced dental equipment appraiser can research and determine a value for these assets.
Another tangible asset in a dental office is the inventory of dental supplies and office supplies on hand. While, in theory, each of the items in this category can be valued, it is common practice to assume that there is a month or two of those supplies on hand and determine their value based on the average monthly expenditures for such items.
The patient records used to be on paper but now exist on computers in many offices. Often these are valued by assigning a dollar amount to each active file based on the cost of reproducing them.
So let’s take a practice that is selling for $600,000 and assume that the dental and office equipment have been appraised at $135,000, the dental and office supplies have been valued at $6,000, and the patient files at $5,000 for a total of $146,000.
The practice is selling for $600,000 but the tangible assets are valued at $146,000. What accounts for the difference of $454,000?
The difference is the intangible value of the practice and that is basically the definition of Goodwill. Or it can be stated that the value of a dental practice that is exceeds the value of the tangible assets is the Goodwill of the practice.
As with everything, it is a little more complicated than that and we’d be happy to explain that to you and show you some examples where Goodwill has been higher or lower based on different circumstances. Give us a call.
In the next post in this series, we will talk about how you can damage or destroy the Goodwill in the sales process.