A rewarding season in the life of any business owner is approaching the horizon of the retirement season. The business that you have poured a career’s worth of effort, work, and investment into has been a profitable venture that has brought you to this point in your life. Part of the crossover to retirement will require selling your business to a younger doctor you’ve partnered with or finding the right buyer who’s in the market to purchase a practice like yours.
Some unique qualities are challenging to evaluate for a physician’s office and are more complex than simply office equipment and furniture. Two areas in this realm are goodwill and intangible assets.
What is Goodwill?
Goodwill is the value of the business above your capital investment into your practice. Goodwill is an intangible asset because it is not tangible or visible.
Here are several factors that could be included in goodwill:
- Reputation in the community
- Brand name
- Customer base
- Good customer relations.
Goodwill cannot be sold or separated from the business at the time of a sale because it is the essence of the business and has an indefinite useful life. It is important to differentiate that some intangible assets can be separated and sold from the business because they have a limited useful life. Examples of a few would be copyright, licenses, trademarks, and even software.
The mathematical way to calculate goodwill is expressed as follows:
Purchase price – Net Asset Value = Goodwill
Example: Brian M.D.
Let us walk through the following example to illustrate:
Brian has been a long-time doctor in the town where he and his wife first settled down. He has had a successful medical career here, they have a happy family, and they are satisfied with life as their kids have grown and they are approaching retirement. Brian has prepared and saved well for these years with his doctor 401k, and he has one final hurdle: valuing and selling his practice.
Let’s say that our friend Brian has invested 3 million dollars into his practice during his career. He has outstanding liabilities of 1 million dollars. His net asset value is 2 million dollars.
Brian has worked hard to create relationships with people in his community. His practice is recognized in the community and stands out as the only practice independent of the local hospital. Brian has developed a loyal customer base and has served them well.
Let’s assume that Brian lists his practice for 5 Million dollars and finds a willing buyer that he trusts. Based on this information, we would determine that the capital gain of 2 million dollars (5 million sale price minus 3 million invested) that he has on his practice is the “goodwill” of the practice he has built. It has become worth that extra 2 million because of the brand, reputation, and customer base he has created.
The buyer of Brian’s practice likely has an inherent understanding that he is buying more than just buildings, property, and medical equipment in purchasing Brian’s practice. This purchase includes the acquisition of Brian’s practice’s outstanding and ongoing goodwill. This will be the foundation and legacy that the buyer will be building upon.
“Price is what you pay. Value is what you get.”
When attempting to measure goodwill for yourself in your practice, you may find it an uncharted route because it is nearly standard to sell the practice and then determine the asset value of goodwill. The buyer will record goodwill in his books as an intangible asset upon sale. You may find yourself wanting to forecast the value of the goodwill you have produced in your practice.
Warren Buffet has been long trumpeted for his quote, “Price is what you pay. Value is what you get.”
Valuing your practice could amount to multi-millions of dollars based on the work you have put in so far. We encourage you not to be daunted by this. Price is what a buyer will pay, but the value & goodwill of your business is worth its weight in gold.
Valuing a practice can be a complex process, but there are some common ways to calculate it.
- Times average profits.
If you feel that another doctor can step in and continue to run the business smoothly without needing much change and continue to earn revenue for several years consistent and similar to what you were earning in your most recent years, this may be an option. You can choose to multiply the average profits of your last few years by anywhere from 3-5. This could be a good option because it values the future income you have produced for the business because of your name and hard work.
- Fair Market Value.
Another option that you may find attractive is hiring a professional to take an inventory of all of your physical assets such as buildings, inventory, real estate, medical equipment, customer relationships, and goodwill. An advantage of hiring a professional is that they will have seen numerous situations similar to yours and will have a good idea of how to value the goodwill of your practice.
- Times Historical Earnings.
A strong positive cash flow business will naturally have a strong fair market value because it is a profitable venture for a possible buyer. Your business’s gross income may play a significant role in determining its current fair market value. Upon analysis, you may find that this method suits your business best.
There is no single correct way to value your practice and goodwill, but these three options demonstrate a few potential ways to do so. We hope this has helped illustrate the importance of planning for your exit strategy from your practice and determining how to value your practice.
We recommend speaking with your trusted advisors to develop a plan and process for this critical step in your career as you approach the exciting crossover towards retirement. IMAFS is a leading medical wealth management firm in Boise, ID, and the surrounding areas. Schedule a consultation with one of our fee-only financial planners, and we’ll help guide you through the process of evaluating your practice for sale.