When you’re buying a dental or medical practice, there’s a lot to weigh up. The numbers, the contract, the lease, the staff, the equipment, the patient base and whether the price actually makes sense.
One of the hardest parts to assess is goodwill, because it can make up a large part of the practice purchase price, but it’s often the least obvious thing you’re buying.
What is goodwill?
Goodwill is the value attached to the parts of a practice that help it keep earning income after settlement. This can include the patient base, location, reputation, referral sources, staff, systems, branding and the relationship patients have with the practice.
Unlike equipment or fit-out, goodwill isn’t something you can physically inspect. That’s why you need to look beyond last year’s numbers and ask what’s really driving the income. Is it a steady, repeatable patient base, or is it heavily tied to the current owner, a few high-value patients or a short-term spike in activity?
When you buy goodwill, you’re not just buying past performance. You’re buying the likelihood that the practice will keep performing once you take over.
Is the goodwill tied to the practice or the seller?
This is one of the most important things to work through before you commit.
Some goodwill sits with the practice itself. That might include the location, patient database, lease, systems, team, branding and reputation in the local area. Some goodwill sits with the seller.
If patients are mainly coming because they trust the current owner, you need to think carefully about how much of that loyalty will transfer to you. This is especially important where the owner is the main provider, has long-standing patient relationships, or is central to most referral sources.
That doesn’t mean you shouldn’t buy the practice. It just means the risk needs to be understood and reflected in the price, the handover plan and the sale terms.
How can the practice handover affect goodwill?
A good handover can protect goodwill. A poor one can damage it quickly.
You’ll want to know whether the seller will stay on for a period, introduce you to patients, help reassure staff and support the change in ownership. Even small things can matter here. A warm introduction from the seller can make patients more comfortable and give staff more confidence during the transition.
If the seller is leaving immediately, that may still work. But you need to understand what that means for patient retention, staff stability and future income.
Goodwill isn’t guaranteed to transfer. The handover plays a big part.
How do you know if the goodwill price stacks up?
Goodwill has value, but it needs to be tested. A proper practice valuation should look at the financial performance of the practice, the value of equipment and fit-out, maintainable earnings, market conditions, growth opportunities and any risks that could affect future income.
It should also consider your plans for the practice. Maybe there’s room to add services, improve systems, extend hours or increase marketing. Those opportunities may add value, but they still need to be realistic. You don’t want to pay today for growth that you’ll have to create yourself after settlement.
Before you commit, you want to be clear on three things.
- Is the price reasonable?
- What risks are you taking on?
- What needs to happen for the purchase to work?
Why should you get advice before buying practice goodwill?
Buying goodwill is really about buying future income. That means you need to understand what sits behind the price before you sign.
At Amalgam Advisors, we help dentists and doctors take the complexity out of goodwill by looking at what is actually driving the value of the practice. We review the financials, assess maintainable earnings, consider the value of tangible assets, and help calculate the goodwill component so you can see what you’re really paying for.
We also work through the practical risks behind the purchase so you can understand what may affect the value, protect your investment and feel more confident before you commit.
If you’re thinking about buying your first practice or purchasing another one, contact Amalgam Advisors today to find out more about our due diligence and practice valuation services.
