feature When an Associate Buys In Valuing the goodwill T he topic of selling a partial interest in your chiropractic practice to an associate who has been with you for some years engenders a host of considerations that are material to both the senior selling chiropractor and the associate. However, there is no proven formula or template to untangle all of the problems, or to resolve many of the differences, at least not one that will work in all situations. Both buyer and seller must work through them, unscrambling each predicament as they go. One of the first considerations is to know why you want to sell a part-interest, thus form-ing what will probably be a partnership of some type, and why the associate wants to buy in. Whatever they may be, the objectives of both will affect the price paid and received but not the value. Value is what something is worth to an average willing buyer acquiring the practice or asset from an average willing seller. Price is what a specific buyer will pay and what a specific seller will accept. Price is affected by individual seller-buyer motives – value is not. The value of a professional practice, including a chiropractic one, is the summation of the value of the real estate, if owned, or the leasehold interest, if not; the in-place value of the capi-tal assets of furniture, fixtures and equipment; the working capital; and finally the goodwill. Determining the value of the first four inputs and distributing those values between seller and buyer is seldom problematic. It’s the goodwill value that creates the difficulty. Lloyd Manning is a semi-retired business, commercial real estate appraiser and financial analyst. His newest book – Winning With Commercial Real Estate – The ins and Outs of Making Money in Commercial Properties is available online from indigo-Chapters. He can be reached at [email protected]. Lloyd Manning GOODWILL CONSIDERATIONS Probably the best definition of goodwill comes from an old English law care when in 1910 Lord Eldon said: “Goodwill is nothing more than the probability that the same customers will continue to patronize the same shop.” In a chiropractic practice, this can be narrowed down to the present value of returning patients and the potential to acquire new ones. Before attempting to pro-rate the value of the goodwill between the selling senior and buy-ing associate, the following are to be taken into consideration: • If the associate left the practice what would he/she take along? • If the associate left the practice, what would be lost by the senior chiropractor? • Has the associate received fair compensation or was (s)he being subsidized by the senior? • Was (s)he subsidized during his/her early years, but is not now? • If there were excess earnings by the associate, were they created by low take-home pay by the senior? • Was the associate properly rewarded for his/her contribution? What is the associate’s contribution worth in relation to the value of the entire practice? How is that contribu-tion valued? Was the associate underpaid, or perhaps overpaid, to ensure that (s)he remained with the practice? • Does the associate consider him/herself as indispensable, that is, the practice would suffer materially if he/she left? • Has the associate generated new patients or relied on the senior to bring them in? • Has the associate created a measurable value to the practice that is realizable on the market? • What incentives were used to attract this chiropractor to your practice? • Have you considered the basics for exit by either party? Few of these arrangements last indefinitely. • Has the fact that you cannot subdivide the value of the goodwill from the remainder of the practice been considered? That is, you cannot sell the goodwill to one party and the tangible assets to another. • Was the possibility of a future buy-in given any consideration when the associate was first hired? • How will the associate’s purchase be paid for? Is seller financing a consideration? Is the price adjusted because of it? • What percentage is the associate acquiring? What are the options for the associate to acquire the remainder? www.canadianchiropractor.ca 18 • CANADiAN CHiROPRACTOR | APRiL 2013
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