Understanding Goodwill

The intangible asset referred to as personal goodwill is a critical component of your practice’s value. This form of asset is often misunderstood, and the legal precedents bearing on personal goodwill are not always easy to interpret. Practice owners need to familiarize themselves with how personal goodwill is perceived from both a legal and tax perspective in order to maximize their practice’s market value and reduce tax liability.

Goodwill can be defined as all of the intangible factors which motivate patients to keep coming to your practice. These factors include your perceived professional competence, personal reputation and specialization. These qualities actually constitute up to 80% of your practice’s value, so it is absolutely essential that you understand how personal goodwill is calculated and how to leverage them in your favor.

Perhaps the most important legal case bearing on goodwill – Norwalk v. Commissioner – ruled that goodwill is a personal asset, not a corporate one. This allows for personal goodwill to be carried off the corporate balance sheet. In most cases, a doctor must be free of a non-compete covenant in order to maintain this separation of goodwill from the corporation’s assets, so doctors should avoid entering into such an agreement when possible.

Here are a few additional recommendations to consider regarding your personal goodwill:

1. If you are already in a non-compete covenant with a corporation, consider terminating the agreement or revising it to exclude those restrictions.

2. Document your goodwill as best you can by emphasizing your relationship with patients and staff. When possible, obtain an independent appraisal.

3. The transition process should include a step that explicitly declares the personal goodwill value to the buyer.

4. A seller may be expected to provide consulting or clinical work during the transition but should be fairly compensated within reason.

The information provided in this article, as well as other parts of this website, is not a substitute for legal or tax advice from a duly-licensed attorney or tax professional. Tax planning for a practice transition can be complicated and we recommend that you visit with an experienced and licensed professional.