Definition of goodwill letter
The intangible asset, commonly known as goodwill, is also commonly misunderstood. Goodwill is generally the largest single component of practice value and its proper tax treatment is not only misunderstood by dentists; but by their lawyers and accountants as well. Let’s review the definition of goodwill and how it should be treated for transition purposes.
Definition: Goodwill is the common term for all of the intangible things that cause people to come into your practice for dentistry. It includes, among other things: office location, staff, reputation, doctor resume and CE, office environment, specialization, if any, etc.
In short, all of the little things that cause folks to know you and respect you are part of goodwill. When valuing a practice, you may think that all of your technology and furnishings and tenant improvement are the largest component of value. In fact, goodwill usually comprises 50-80% of practice value.
We will leave the science and theory of valuation for another article; but suffice it to say that when we value a practice, we are determining the value of both the goodwill and the tangible assets.
As mentioned above, goodwill is usually the most significant portion of the purchase. It is therefore essential that we know how to treat this component, for tax purposes.
Source: Healthcare Blog
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