SUBDIVIDING THE GOODWILL In professional practices, there are two distinct types of goodwill: first, personal or professional, and second, practice goodwill. Per-sonal or “professional goodwill” is attributable to the person who created it and is what the U.S. courts classify as “Non Realizable.” That is to say, it cannot be sold, traded or encumbered. It is ex-clusive to the professional who created it. If that person leaves the practice, it leaves too. The second type, “practice goodwill,” is what the same courts define as “Realizable Goodwill.” It is part and parcel of the entire practice – it is not attributable to any one person or value generator, but was created by the blending of several influences. If the practice is sold, provided that it goes with the package, and although not separable therefrom, it has a marketable value if it is transferable to a buyer. However, there is no proven formula or template by which subdivisions of this form of goodwill into its various contributions or ownerships can be determined. The Associate’s Position The normal custom in the sale of a fractional interest in a professional practice is that the realizable goodwill is the sole property of the seller. (S)he will want full value for it while the buyer may expect a discount based on the fact that (s)he has materially contributed to the viability and present market value of the practice. The pitch goes, “It would be worth substan-tially less without my contribution and as I created part of it, a portion of the goodwill value should be deducted from the practice’s purchase price. The position of the seller is that (s)he doesn’t want to lose the associate, or the sale, but is not Santa Claus. This then raises the question: does the associate have a valid argument? Division of Expenses That the associate generated, say 40 per cent of the gross revenue to the practice does not mean that (s)he also contributed 40 per cent to the after-tax net profit. Irrespective of billing differences, each par-ticipant consumed an equal amount of the fixed expenses of rent, taxes, property insurance, etc. Thus the fixed expenses are divided 50-50 between the senior and the associate. Variable expenses are based on the percentage of the billings or gross income generated by each chiropractor as (s)he who bills more also consumes more. The division of the goodwill estimate between the chiropractors would be the percentage of the net profit that each contributed to it. However, as mentioned, there is no formula or template by which the respective value of each contribution to the goodwill can be calculated. Attempts were made by this writer to do this mathematically, but on each occasion no defendable answer was produced. The only conclusion that can be drawn is that the re-alizable goodwill of the practice must be attached to it as a single entity. It is an integral part of the value of the practice as a whole and it cannot be segregated into identifiable portions that can be individually valued. It all boils down to the fact that all professional practices must be sold as working units in place, that is, with all value-contributing components working together in a harmonious relationship. That one claims that because of past labours and dedication (s)he owns a certain percentage of the goodwill does not imply that this per-son can extract it. It all belongs to the firm, which in the case of a one-person owned chiropractic practice, is the senior chiropractor. That the seller may juggle selling price on account of the associate’s contribution to the goodwill is a question of personal proclivity. It is not a fact of the market. • 20 • CANADiAN CHiROPRACTOR | APRiL 2013 www.canadianchiropractor.ca
Chiropractic + Naturopathic Doctor April 2013: Page 20
