What Is Goodwill When Buying a Dental Practice in Ontario?

If you are looking at buying a dental practice in Ontario, you have probably come across the word “goodwill” somewhere in the purchase price discussion. It often makes up a large part of what a buyer is asked to pay, sometimes more than the equipment, supplies, or leasehold improvements combined. But goodwill is not always easy to pin down, and depending on the facts, what it actually represents can vary from one practice to the next.

This article walks through, in plain language, what goodwill generally means in the context of a dental practice sale, what it may be tied to, and why it is usually worth having a lawyer review this part of the deal before you commit to a price.

Goodwill Is Not a Physical Asset

When you buy a dental practice, you are typically buying two broad categories of value. The first is tangible, things like dental chairs, equipment, instruments, and supplies. The second is intangible, and this is where goodwill fits in. Goodwill generally refers to the value of the practice beyond its physical assets, tied to its ability to keep generating revenue after the sale.

In other words, goodwill is often described as what you are paying for the practice's reputation and its ongoing relationship with patients, rather than for the chairs and equipment sitting in the office. It is a somewhat abstract concept, which is part of why it can be a source of disagreement between buyers and sellers.

What Goodwill May Include

Depending on the facts, goodwill in a dental practice may be connected to a number of different factors, including:

1. Patient base and patient loyalty. A practice with an established, active list of returning patients may carry more goodwill than one with a smaller or less consistent patient base.

2. Location. A practice in a high-traffic or convenient location, with good visibility and accessibility, may be seen as having stronger goodwill than one that is harder to find or reach.

3. Reputation. Online reviews, word of mouth referrals, and the practice's general standing in the community can all factor into how goodwill is assessed.

4. Staff and systems. An experienced, stable team, along with efficient scheduling, billing, and administrative systems, may contribute to how smoothly the practice can continue operating after a change in ownership.

5. Referral relationships. Ongoing relationships with other dental professionals or specialists who refer patients to the practice may also be considered part of its goodwill.

This is not a complete list, and which of these factors matter most, and how much weight each one carries, will generally depend on the specific practice and the deal being negotiated.

Why Goodwill Can Be Hard to Value

Because goodwill is intangible, there is no single formula that applies to every practice. Some buyers and sellers rely on a valuation professional to help estimate goodwill, often based on factors like historical revenue, patient retention, and comparable sales in the area. Even then, valuation is not an exact science, and reasonable people can land on different numbers for the same practice.

This is one reason buyers are generally encouraged to do their own due diligence rather than relying solely on the number a seller proposes. Reviewing patient records (in a manner that respects privacy obligations), financial statements, and patient retention trends may help a buyer form a more informed view of whether the goodwill being asked for lines up with what the practice is actually generating.

Goodwill and the Purchase Agreement

How goodwill is treated in the purchase agreement can matter just as much as how it is valued. Depending on the facts, an agreement may include terms addressing how long the outgoing dentist will stay on to help with the transition, whether there are any restrictions on the seller opening a competing practice nearby, and what happens if patients do not stay on with the practice after the sale.

These kinds of terms can affect whether the goodwill a buyer is paying for is likely to hold its value going forward. A purchase agreement that is silent on these issues may leave a buyer with less protection than they expect.

Tax Considerations

Goodwill can also have tax implications for both the buyer and the seller, and how it is allocated within the purchase price may affect the tax treatment of the transaction. This article does not provide tax advice, and anyone buying or selling a dental practice should review the tax consequences of the deal with a qualified accountant before finalizing the purchase price.

Final Thoughts

Goodwill is often one of the more significant, and more difficult to pin down, parts of a dental practice purchase. Understanding what it may represent, and how it is addressed in the purchase agreement, can help you go into a negotiation with a clearer picture of what you are actually paying for.

Before agreeing to a purchase price or signing a letter of intent, it is generally a good idea to have a lawyer review the proposed deal structure, along with an accountant or valuation professional where appropriate, so you understand what you are agreeing to and how it may apply to your specific situation.

Frequently Asked Questions

Q: Is goodwill always included when buying a dental practice in Ontario?

A: In many cases, yes, since goodwill often makes up a meaningful part of the purchase price. That said, how it is defined and calculated can vary from deal to deal, and this is something that should be addressed clearly in the purchase agreement.

Q: How is goodwill usually calculated for a dental practice?

A: There is no fixed formula. Valuation professionals may look at factors such as historical revenue, patient retention, and comparable sales, but the approach can vary depending on the practice and who is preparing the valuation. A lawyer and valuation professional can help you understand the approach being used in your deal.

Q: Can goodwill lose its value after the sale closes?

A: Depending on the facts, yes, it is possible. If patients do not stay on with the practice, or if the transition is not well managed, the goodwill a buyer paid for may not hold up the way they expected. This is one reason transition terms in the purchase agreement can matter.

Q: Do I need a lawyer to review goodwill terms before buying a practice?

A: It is generally a good idea. A lawyer can help review how goodwill is addressed in the purchase agreement, including transition terms and any non-competition provisions, so you have a clearer understanding of what you are agreeing to before you sign.

Contact DevLaws

Buying a dental practice involves more than agreeing on a price, and goodwill is often one of the more complex parts of the deal to work through. If you are considering buying or selling a dental practice in Ontario, DevLaws can help. Contact DevLaws today to schedule a consultation and talk through your specific situation.

contact@devlaws.com | +1 437 290 0424 | devlaws.com

Disclaimer

This article is provided for general information purposes only and does not constitute legal advice. It is not intended to create a lawyer-client relationship. Laws and regulations can change, and the information here may not reflect the most current developments. Every situation is different, and the information in this article may not apply to your specific circumstances. If you are considering buying or selling a dental practice, you should consult a qualified lawyer, and where relevant an accountant or valuation professional, for advice tailored to your situation. DevLaws does not guarantee any particular outcome or result.