|Timothy Brown, CEO of ROICorp, returns to Oasis Discussions to shed some light on goodwill.|
Goodwill is an important aspect of a dental practice and contributes to the valuation or appraisal of the practice. However, do we really know what factors weigh into determining the goodwill of a practice?
Goodwill is comprised of hidden value. ROICorp uses ~250 various components (eg. # of bathrooms in an office, etc.) Traditionally, goodwill has been calculated as:
# of patients x “n” amount of $. Then, it moved towards a set percentage of billings and may still be calculated this same way today by some. Presently, goodwill is represented by a multiple of earnings of the business (EBIT or cashflow).
The law of supply and demand also affects the multiple of earnings that is used to calculate goodwill. As an example, there is a higher demand for general practices in comparison to specialty practices. As such, a higher multiple is used for a GP versus a specialty office when determining goodwill.