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The Meaning of Goodwill

Here's how to understand goodwill and build equity in your practice.

Richard S. Kattouf, O.D., D.O.S.

Q There have been many articles regarding an optometric practice's goodwill value. Just what is goodwill? If there is value in it, how can I increase that value?

Dr. G.L. Layman
via e-mail

A: Goodwill is the equity (value) the owner has built in his/her practice. If you are a practice owner, the goodwill of your practice should increase annually.

Appraisers evaluate many factors to determine the value of goodwill. The following points identify these factors and explain what you can do to increase goodwill value.

► Age of the practice. Certainly an older practice indicates years of service to the community. However, if your gross and net incomes are flat or declining, then age is not always an asset.
► Gross income. Exhibit income growth to receive a high goodwill value. Consider raising fees, maximizing medical reimbursements, adding new profit centers, such as optometric specialties, teaching staff professional sales techniques to increase unit sales per patient and implementing marketing techniques.
► Net income. Many of the suggestions listed in “gross income” are applicable here. Other critical factors are low cost of goods, keeping the percentage of salaries-to-gross within proper limits and developing check-and-balance systems to limit embezzlement.
► Staff retention. When patients are familiar with employees, they feel a high degree of comfort. However, if the current owner does not enforce boundaries of behavior, a new owner may have difficulty implementing necessary standard operating procedures, which could jeopardize productivity and efficiency.
► Seller's reputation. Normally, a doctor's reputation creates positive goodwill. Kattouf Consulting Services (KCS) recently represented a “buyer” of a practice who offered $900,000 which was accepted. KCS was in the process of developing the buy-sell agreement when we discovered insurance fraud charges were filed against the seller. If these charges are true and the news media reports them, then the goodwill value of the practice plummets. KCS advised the buyer to adjust his bid to $500,000—the eventual selling price.
► Recall effectiveness. Most standard methods have a 20% efficiency ratio, or for every five recalls, one makes an appointment within the time frame requested. The higher your efficiency ratio, the more likely you'll increase goodwill.
► Pre-appointing patients. Doing so adds to goodwill.
► Fees. If your medical fees are below the average ophthalmological rates in your region, your goodwill declines.
► Medical reimbursement. Normal-to-high medical reimbursement levels raise goodwill value.
► Debt service. A significant debt service could lower a practice's goodwill depending on the reasons.
► Optometric specialties. A “general” practice, which depends heavily on optical and contact lens profits, could have low goodwill due to limited income streams.
► Lease agreement. The buyer needs an agreement that enables him/her to stay in the location for a minimum of three years.

Finally, understand that the calculation of something as important as the equity of your practice is not a simple matter. OM