Is goodwill enough?

March 21, 2012

The dental profession certainly knows what goodwill is and what the general understanding of its value means to the dental practice and its owner. Most experts allocate high percentages of the value of the dental practice as a whole to goodwill, compared to equipment, supplies and other items in the sales agreement or valuation report. Goodwill is a method of choice for allocation when a seller looks at tax implications from his or her sale compared to other sources of designation of assets or service and administrative charges for their sale.

The dental profession certainly knows what goodwill is and what the general understanding of its value means to the dental practice and its owner. Most experts allocate high percentages of the value of the dental practice as a whole to goodwill, compared to equipment, supplies and other items in the sales agreement or valuation report. Goodwill is a method of choice for allocation when a seller looks at tax implications from his or her sale compared to other sources of designation of assets or service and administrative charges for their sale. This allocation is based on its treatment for capital gains taxes compared to other items that could have ordinary income tax ramifications and cause higher tax rates. There is a difference between the personal goodwill of the dentist and the goodwill attributed to the dental practice itself commonly known as enterprise or institutional goodwill. Many times this allocation is used as part of a sales and tax planning approach.  For litigation purposes, this allocation has a major bearing on the outcome of the distribution of potentially hundreds of thousands of dollars from one spouse to the other based on the final ruling of the court.

Litigation proceedings and the impact on the allocation of goodwill

Unfortunately, litigation proceedings such as divorce and partnership disputes have added a new dimension to the meaning of goodwill and its segregation into one of the two categories that either assist the dentist in maintaining his or her financial well being, or that dramatically alter the future of that dentist trying to preserve the sanctity and value of the dental practice and his or her own personal net worth. The allocation of the dollars attributed to the dentist’s personal goodwill or to the goodwill of the dental practice itself is of the utmost importance for determining the outcome of litigation regarding the dental practice value for distribution purposes to the spouse. What constitutes personal goodwill and what is the enterprise or institutional goodwill (the dental practice) value definition?

Personal goodwill and enterprise goodwill

A summary definition of personal goodwill is the value of the earnings or cash flow attributed to the individual and his or her characteristics or attributes. It is a function of the earnings generated from the repeat patients who seek the individual practitioner compared to the practice personnel, whom ever they may be. It is new patients and new referrals who want the individual dentist and who are not patients because of another reason. These points of referral may be based on the individual’s skills, reputation and other factors. The assumption is that if the individual dentist was not there, the patients would go elsewhere.

The enterprise or institutional goodwill (the dental practice) is the value of earnings or cash flow attributed to the dental practice. It is the function of earnings from patients on a repeat basis that seek the office and its staff and new referrals made to the office and not to the individual or because of the individual. Enterprise goodwill is based on people coming to the office regardless of whom they see. It may be because of location, staff, website appeal, telephone number and the reputation and characteristics of the enterprise.

The ultimate test of goodwill value for a dental practice depends on whether that goodwill value is transferrable to a buyer, including an associate who may be the buyer.

Another factor in measuring goodwill value is the profitability of the dental practice. What compensation and benefits are received by the dentist?

Market competition also is an indicator of a dental practice’s goodwill value.

How do the enterprise and personal goodwill attributes factor into an allocation decision?

All of the above items are analyzed during the discovery and litigation process to determine how much to allocate to each.  The experts will opine as to how much should be personal and how much should be enterprise goodwill. Support for each allocation will most likely come from the study of each of the factors listed above. A solo practice certainly has more of a chance to have most of the allocation attributed to personal goodwill at first glance. Its personal goodwill value may diminish if the individual utilizes the enterprise goodwill attributes, however. Are there multiple offices owned by the individual? Do patients come to see the staff or an associate and not the owner? What is the name of the dental practice? Is the individual’s name excluded from the practice name? What are the marketing efforts? What is on the web site, in professional journals and other advertising media regarding the dental practice and the individual owner? What is the type of professional entity used by the dentist? Is it a proprietorship, corporation or limited liability company? All of these factors effect the valuation.

The meaning of goodwill within the practice valuation

After the formal valuation of the dental practice has been completed, the goodwill or intangible valuation has been given an allocation and the tangible or physical asset value has been noted on the valuation. With many valuations prepared on a “going concern” basis, the goodwill then should be divided between personal and enterprise goodwill in a separate opinion to determine the allocation for each in the event of future or current litigation. That allocation will determine the ability for people to continue to live the way they have been living or to be forced to litigate the value of goodwill that may not have been addressed in any manner before.

Bruce Bryen is managing partner for Bryen & Bryen LLP, Certified Public Accountants. Based in New Jersey, Mr. Bryen specializes in deferred compensation such as retirement plans, income and estate tax planning, the determination of the proper organizational format, asset protection and structuring loan packages for presentation to financial institutions. Bruce is also experienced in providing litigation support services and has testified on numerous occasions as an expert witness. Contact him at 800-988-5674, ext. 112.