Guide to Goodwill Valuation

Buying or Selling a Practice? …What about Goodwill?

Being a chartered accountant who has been involved in the financial affairs of chiropractors for over 15 years I have clients ranging from associates to multi-director limited companies with several practices. I have noticed a relatively common life-cycle for the ‘average’ chiropractor – progressing from graduation to an employed associate; becoming more successful and starting/purchasing own clinic; selling the now successful practice or expanding to encompass further clinics.

As you can see, clinic purchases/sales are an integral part of the chiropractic profession, but just how much is an established clinic worth?

Is it just the value of the assets (- a few items of equipment) and away you go? Clearly not. As many of you will recognise, there is considerable value in the established client list, the level of awareness of chiropractic in the area, and many other criteria not capable of immediate or definite valuation. So let me set the scene a little for you:

GOODWILL is…
…for the boffins
a) the value paid over and above the value of the separately identifiable net assets.
…in simple(r) terms
b) the amount paid in recognition of the sustainable profits the clinic will generate in the future.

Therefore the larger the (future) profits, the greater the value inherent in the practice. Due to the thriving UK chiropractic market I have become increasingly involved in practice valuations for both buyers and sellers. Early days practice valuations followed one of the following two methods, normally issued by well-meaning friends/colleagues.

(1) ‘Take 1 –  1½ times your turnover’
(2) ‘It’s the average of the last 3 years profit multiplied by 3’

But how much science is there in that? Turnover for one does not recognise the ‘bottom-line’ profitability of a practice. What if costs exceed income!? Historic profitability is arguably better but cannot fully substantiate future revenue streams. Why just the last three years? And why multiply by 3? Why not 5, or 2? The answer to these questions lay in the fact that basically it was simple. So long as the buyer is willing to buy it at that price and the seller sells, who cares?

That approach is all well and good until such time as you choose to sell. You get the accounts made up to date, apply the magic formula, place the ad’ in Contact and ‘hey presto’ better pick up a few holiday brochures on the way back from the letter box! But sadly the first few people who make enquiries don’t necessarily agree with the valuation.

‘But why not?’ you yell. The simple reason is that things have moved on. People need to justify the valuation to potential lenders, such as banks and other finance institutions. They want to ensure their lending is going to be repaid and the amount paid for goodwill can be recovered. And let’s not forget the Inland Revenue. Gains made on goodwill fall squarely within their scope and have massive tax consequences

to find out more about goodwill valuations call 01326 660020 or email support@finance4chiropractors.com

Developing a model that would consistently value practices has allowed me to fulfill the more demanding needs of the clinic valuation. The model uses the historic performance as mentioned above, but crucially, is based upon an extensive risk analysis of those factors important to chiropractic success:

  • Performance
  • Potential
  • New patients and marketing
  • Competition
  • Tenancy/freehold
  • Location
  • Premises

The risk assessment, and additional information collected from my own portfolio of clients’, the chiropractic professional bodies, and with considerable input from the financial institutions, the model will place the goodwill valuation in its relative market position. Anybody who is considering buying or selling a practice can use this model to establish the price (or more accurately – the range of prices available to start negotiations).
I would welcome readers’ comments on any of the above. My understanding of chiropractic will always continue to grow, and there may be chiropractors reading this who feel they do not fit the mould and wish to share their experiences.

finance4chiropractors could well help you to achieve your desired price. During our years of acting for chiropractors we have coordinated the skills of all aspects of finance so that we are now able to offer a complete support for you and your practice. Not only do we just offer the valuation report, but we are also able to offer negotiation advice based upon our industry-accepted experience, legal advice, and most importantly funding. A relationship with the UK’s leading chiropractic fund provider can be the killer stroke – imagine being able to agree a price with a potential purchaser and being able to organise the funds for them!

to find out more about goodwill valuations call 01326 660020 or email support@finance4chiropractors.com