Internal Sale - who owns the goodwill?23 Apr 2019 - Simon Palmer - Practice Sales Vet Practice Sales
For many contracted veterinarians, their planned path to ownership involves the buy-in or buy-out of the practice they are already working in. It should be the ideal buy-in scenario… They have effectively taken the practice for the equivalent of a test drive and know it inside-out, so the purchase involves far less risk than buying any other practice. They already know, hopefully get on with, and are accepted by clients and staff; they know the quality of the equipment, and there is a mutual respect with the vendor.
However, when an internal sale like this often starts to unravel, is when the buyer is presented with the price/valuation for the practice, and a simple, inescapable fact starts to dawn on them…
Some of the goodwill that they are being asked to buy is related to clinical work that they themselves did in the practice while they were working there.
To some extent, the hours of hard-work that the contractor has put into the practice have led to a higher price/valuation for the practice… and this fact starts to eat at them. On some level, the contractor feels that they shouldn’t be asked to pay for goodwill that they themselves created, and starts to voice this point of view in negotiations with the vendor.
If you find yourself in this situation when buying a practice, here are a few points to consider:
If the practice was put on the open market with competitive bids, the valuation or price achievable would be based on the total production of the practice. By asking for your personal production not to be included in the price appraisal of the practice, you are in effect claiming some ownership of this goodwill already. At this point you need to stop and think for a minute…At what point did you acquire it? How did it become “yours”? Did you ever pay for that part of the business? Or are you implying ownership because you were good at your job and the clients you saw became repeat and referring?
a. If ownership of goodwill was assumed by being good at a client-facing job in this manner, every restaurant would have equity partly owned by its waiters and every café by its baristas. If, as a contractor, you took a wage (or commission) for your work, then you have already been paid in full for your efforts. You don’t own the goodwill of the practice you work in by virtue of your efforts, any more than the barista, waiter or chef paid an hourly rate owns part of the restaurant or café that they work in.
b. If you are currently implying ownership of the practice’s goodwill because of your efforts, ask yourself - would you chip in if the business became unsuccessful or was forced to shut-down? Would you have been partially liable if the practice couldn’t meet its financial obligations? Or are you implying ownership only if and when the practice is successful?
As much as you believe that you created your goodwill with the clients whose animals you treated, this thinking shows a total lack of appreciation for the financial risk and effort that the owner contributed to the production you performed. You may have been the veterinarian who did the clinical work but, in order for you to do so, the owner risked significant capital outlay by:
- buying or setting up the practice (paying for equipment, fitout, initial goodwill, etc.)
- marketing to clients
- ensuring that staff, equipment and consumables were at the ready and at a high standard for you to use.
As good a veterinarian as you are, there is an excellent chance that you are not the sole reason that your clients are coming to the practice. Clients become loyal to a practice for many reasons. Yes, there is a percentage of clients that are loyal to their veterinarian, but few clients are loyal to their practice for the veterinarian alone. Most are there for many reasons:
- There is always a percentage of clients that are loyal to a practice because the location of the practice is convenient. Perhaps it is close to work, home or their kids’ school.
- Some clients will be loyal because of the quality of the client experience that they get, from the time they call the practice to the time they leave.
To claim that you own the goodwill of your clients is to state that they are there for you alone, irrespective of the practice’s location (whose rent you didn’t pay), and the service levels created and maintained by the staff (whose wages you didn’t pay). This way of thinking is naïve at best and egocentric at worst. Chances are:
a. Your clients are there for a multitude of reasons, and many would still be there if you were not.
b. As good a veterinarian as you are, there is a good chance that another associate may have done just as well if they were given the same opportunity.
Being asked to pay for goodwill that you helped create may bother you on some level, but it is important to remember that your clinical work and personality alone didn’t create the practice’s goodwill. It was (at best) an important part of a much larger machine with lots of moving parts. When you worked in the practice you were paid a good salary and you took no financial risk doing so. When you’re in the vendor’s shoes, you too will want to enjoy the full benefit of selling the asset you paid for and worked hard to build.