The Goodwill of Business Owners
What is Goodwill?
Every business owner and every professional in private practice owns a valuable and intangible asset called goodwill. It is an accounting term that places a dollar value on a business enterprise over and above the value of its tangible assets. For example, if you receive an offer of $300,000 for your practice and the tangible assets are only worth $75,000, then the balance of $225,000 is considered goodwill.
Where Does Goodwill Come From?
If you start a practice from scratch, a strong clientele or patient base will take years to build. If you purchase an existing practice, you have to pay dearly for its clientele. There are customs that alleviate the huge burden of paying for goodwill. It is customary for the seller of a practice to assist the buyer with financing, usually by accepting a personally guaranteed note that is paid with income the practice generates after it is sold.
An informal custom is that a professional becomes a partner once the existing partners recognize the substantial amount of goodwill that their employee has created. The value of the employee’s goodwill is then transformed into his share of ownership as a new partner in the practice. If the current owner does not recognize this added value in due time, the professional sometimes walks away with a fair percentage of the clientele (goodwill) of his former boss.
A business owner must constantly nurture and recreate goodwill. By its very nature, goodwill is alway eroding. A business will, from time to time, lose clients to its competitors and a loyal client may relocate to another city. Your ability to create and maintain unique relationships will either enhance or hamper your prospects for growth.
Building special relationships with the individuals to whom you render your services is a key method of creating goodwill.
You can also accelerate the creation of goodwill by networking with professionals in unrelated fields in addition to networking with those in your line of work.