A lot is written and spoken about goodwill in a business, but in its simplest terms it refers to the value of a business over and above its tangible assets. It’s easy enough to understand the value to physical (i.e., tangible) assets like equipment, chairs, or computers, it’s harder to put a monetary price on a loyal client base and respected and/or well-known brand. Nevertheless, the value of goodwill is hugely important to any business, certainly when it comes to achieving the best possible price in a sale, but even when running a business day to day, it makes sense to maximise its potential.
Lis Hughes of Frank Taylor & Associates discusses some of the levers which can be used to increase the goodwill in your practice, either ahead of a sale, or just operating as an ongoing concern.
“The outstanding period on a lease can have a big impact on a practice’s valuation” explains Lis. “Most purchases are funded, on average to the tune of 80%, by a bank loan. The duration or term of that loan will not exceed the remaining lease on the property. Therefore, if you aim to fund a purchase of £1,000,000 with a loan of £800,000, the monthly repayment will be considerably more if you need to repay over, say, five years, than 15. In this example the monthly repayments could be anywhere from £8,000 to £10,000 less for a practice with the longer lease, which for many may be a game changing figure. If you are thinking of selling, it may benefit you to extend the lease, and as a rule of thumb, it was worthwhile investigating a lease extension for any lease with under 10 years remaining. It is also vital to ensure you set the right context for your request with the landlord. We have heard horror stories of large payments to landlords (up to £50,000) for help with lease extensions. Explaining that you are looking for more security and stability for the business to aid your long-term planning should help you avoid being caught like this.
“A second tactic”, continues Lis, “is to review the number of referrals you make and to question whether you could take that work ‘in house’. Valuations are based on multiples of earnings, so even referring on what, on the face of it, may seem a small piece of business, can have a bigger impact when the multiplier is applied. For example, two implant treatments per month, with a margin of 30% may equate to around £1,500 of potential profit referred on each month. Annually this is around £18,000 and with a typical multiplier of five, this is £90,000 of avoidably lost goodwill. In short, think carefully about referring work on, and if in doubt, don’t. On top of this, and probably harder to quantify, are the added benefits of developing deeper relationships with your patients, who will spend more time with you, and of establishing your practice as a centre of excellence for a wider range of treatments.
Next month we will explore further tactics around efficiency and stability that can also work to boost your practice’s goodwill.
For more information on how Frank Taylor and Associates could help your business, please contact us on 0330 088 1156.
