Measuring Enterprise vs. Personal
Goodwill
by
W. James Lloyd, CPA/ABV, ASA, CFE, and
Carol Carden, CPA/ABV, ASA, CFE
ValuePoint Consulting Group, LLC
Published in East Tennessee Medical News - April 2007
Goodwill is probably the most widely recognized and least understood
of all intangible assets. The purpose of this article is to help
the reader 1) better understand the difference between enterprise
and personal goodwill, 2) offer some insight into how goodwill
is measured, and 3) provide suggestions for increasing goodwill
and the value of the business.
Defining goodwill
What is goodwill? Enterprise goodwill is the portion of an entity’s
total value that is not attributable to other tangible and intangible
assets such as real estate, equipment, licenses, trademarks,
etc. Personal goodwill is the value associated with a particular
individual.
Why is it important to be able to measure goodwill? An important
distinction between enterprise goodwill and personal goodwill
is that enterprise goodwill can generally be transferred in a
sale transaction while personal goodwill cannot. Therefore,
when valuing a business, particularly a personal service entity
such as a medical practice for a buy/sell transaction, it is
extremely important to distinguish between the goodwill of the
entity and the goodwill of the individuals who work for it. Buyers
of medical practices (and other businesses) would only expect
to pay for the transferable goodwill of the entity as opposed
to the non-transferable personal goodwill of individual physicians.
Measuring goodwill
Enterprise goodwill is often influenced by factors such as reputation
and location. For example, many people go to the Mayo Clinic
because of its excellent reputation for quality service rather
than a specific physician who works at the clinic.
Goodwill is typically measured as the difference between the
entity’s total enterprise value and the value of its underlying
net assets (total assets less total liabilities). Therefore,
for the entity to have goodwill, its total value must be greater
than the value of its underlying net assets.
Separating personal and enterprise goodwill is generally performed
by preparing a “with and without analysis.” Such
an analysis attempts to measure the value of the business “with” the
services of a particular individual involved in the operations
of the entity and again “without” their involvement.
The difference between the “with” and “without” amounts
is considered the value of the individual’s personal goodwill.
Improving goodwill
Enterprise goodwill generally results in higher revenues, profitability,
and value. Therefore, it is important for owners’ to operate
and manage their business in a manner that maximizes the entity’s
goodwill. Some of the factors that influence enterprise goodwill
include the entity’s 1) reputation in the marketplace,
2) depth and quality of employees, and 3) location.
The success of many medical groups is often directly related
to the reputation of its individual physicians. However, it is
generally possible to build goodwill in the entity itself by
offering ancillary services and/or utilizing mid-level service
providers. Generating revenue without the personal service of
the physician(s) builds the entity’s goodwill and value.
Another way of increasing enterprise goodwill is through branding.
Branding can be an effective means of building enterprise goodwill,
especially if the entity’s name is not directly associated
with the individual owners – for example, “WeCare
Medical Group.” The name WeCare Medical Group can have
long-term value even after the individual physicians who started
it have long since retired. In addition, a consistent message
that focuses on the positive attributes of the practice such
as: quality service, caring employees, and convenient hours and
location, should be used to build awareness with the public.
Quality employees are often difficult to find and expensive
to recruit and train. Therefore, a team of well qualified and
motivated employees can be a significant contributor to the entity’s
goodwill. Although building the right team will take time and
patience, the results are generally well worth the effort. Employment
contracts and non-competition agreements with key employees can
also add value to the entity if they are enforceable. However,
the laws regarding enforceability of non-competition agreements
vary from state to state.
Finally, the goodwill of a business can be significantly impacted
by its location. A convenient and easy to find location can have
a positive impact on volume, which in turn should increase revenues
and profits.
Summary
By understanding the key factors that influence enterprise goodwill
such as: building brand identity, leveraging the owners’ personal
efforts, recruiting and retaining quality employees, and having
convenient locations, business owners can focus on ways
to improve the entity’s long-term value. This will probably
never be more important than the day the owner(s) decide to sell
the business.
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