Business goodwill valuation comes up often in the context of valuing professional practices and consulting service businesses. The typical examples are medical, dental and other healthcare practices, CPA and law firms, engineering and architecture consulting businesses and other professional service companies.
A key question you may need to address is how much of the practice or business goodwill can be transferred to new ownership. In addition, legal dispute situations generally require that practice goodwill value be included in your business valuation.
Business goodwill sources: business or personal?
An important challenge you may face is how to distinguish between the business goodwill and professional goodwill. Business goodwill is created by the business or practice itself. On the other hand, professional goodwill is personal in nature – it is associated with the individual professional practitioners.
This distinction is significant because it is generally much easier to transfer goodwill that is associated with the business, rather than an individual professional practitioner.
Elements of professional goodwill
You may need to separate the professional from business goodwill in many practice valuation situations. Here are the key elements that help you identify the professional goodwill:
- Practitioner skill and ability.
- Professional judgement.
- Practitioner age and health.
- Professional’s reputation and name recognition.
- Fee schedule commanded by the individual professional.
- Personal referral base.
- Level of client involvement.
- Work habits.
High levels of specialized skill, demonstrated ability and excellent professional judgement are strong indicators of professional goodwill. Clients tend to trust professionals that are skilled and make correct decisions.
Professionals that are in good health and have a long career horizon have excellent earnings outlook – a major element of continued professional goodwill.
A professional who is respected by peers and clients tends to be successful and enjoys excellent earning potential.
In addition, the fee schedule indicates how well the professional can translate the skill and reputation advantages into superior earnings, and greater professional goodwill.
Clients are a lifeblood of any professional practice or service business. The practitioner who has a steady, high quality referral base creates a considerable level of professional goodwill. Answer this question: do the referrals occur because of the business or individual professional’s reputation? The greater the level of professional’s involvement with the clients, the greater professional goodwill.
While it is common knowledge that professionals work long hours, how well you allocate your time among the various tasks can make a big difference to your earnings.
Predictably, professional goodwill increases as the practitioner dedicates more time to the highest value-creating tasks.