Distinguishing personal vs. enterprise goodwill in dental practice valuations

When preparing dental practice valuations for divorce proceedings in equitable distribution states, many evaluators rely on shortcuts to determine goodwill value. Some use only gross revenue produced by the dentist as the ultimate factor when assigning goodwill value. Others rely solely on the dentist's compensation as the measuring tool for determining personal goodwill.

Bruce Bryen, CPA, CVA.

Since goodwill represents the primary asset in a dental practice, its determination is essential to establishing the practice's overall value. Personal goodwill is not considered a marital asset in 40 of the 50 states, making the allocation of it a critical factor in dental practice valuations. Understanding the attributes of personal goodwill compared to enterprise or practice goodwill assists courts and arbitrators when making distribution decisions.

Rather than merely using gross revenue or compensation factors, evaluators should conduct a scientific analysis of the attributes that comprise personal goodwill. Comparing these attributes to enterprise goodwill helps courts understand the differences and enables clearer, more understandable opinions. With at least 15 to 20 personal goodwill attributes to consider, the following represents key factors and their meanings.

Practice name as an indicator

The dental practice name serves as an indicator of personal versus enterprise goodwill attributes. If the practice name includes the dentist's name, it tends toward personal goodwill. Conversely, dental practices that have joined dental service organizations (DSOs) and prominently display corporate names align more with enterprise attributes.

When an individual owns multiple dental practices and associates their name with each location, the attributes lean toward personal goodwill rather than corporate or enterprise goodwill. Practices prominently displaying the individual dentist's name carry heavy weight in favor of personal goodwill attributes compared to enterprise goodwill.

Age, health, and work ethic

For corporate entities such as Heartland Dental, Aspen Dental, or other named practices not including the individual dentist's name, the evidence strongly suggests that age, health, and work ethic of the individual dentist are not essential factors. In these cases, goodwill is more attributable to the enterprise. Corporate ownership typically involves multiple professional dentists working at the practice and a single dentist serving as an identifiable leader for these attributes.

In noncorporate ownership situations, the individual dentist can be easily identified. This person typically arrives before other staff members, works later than others, and maintains good enough health to continue long-term practice operations. This dentist usually has their name associated with the practice through signage, marketing efforts, or advertising. There is typically no substitute for this dentist and their associated age, health, and work habits.

Ability, skills, and judgment

When determining whether a clinician's ability, skills, and judgment constitute personal or enterprise goodwill attributes, the analysis depends on whether the practice operates as a corporate entity or a personal ownership situation. 

In corporate-type practices such as the DSO model, multiple dentists typically work at each practice and rotate between locations. It becomes nearly impossible to rely on the ability, skills, and judgment of a specific dentist consistently, as dentists rotate to various locations.

Patients may not know about dentist rotation until they're in the chair waiting for treatment. Evaluating the dentist's skills and ability occurs only during the visit, and patients cannot assess whether the current dentist will perform quality work until treatment begins. If questions arise during treatment, hopefully another professional is available to provide answers if the current dentist cannot.

For individual dentist-owners, this attribute almost certainly falls under personal goodwill. That dentist will be present to answer questions, perform clinical work with patients, and use their experience and judgment to maintain high professional standards.

Personal reputation

At corporate dental practices, the personal reputation of individual dentists carries less meaning than in privately owned practices. While no one wants a dentist with a poor reputation, the corporate model presents challenges, because patients may not know which dentist will provide treatment until they're in the chair.

Private practice owners work with patients during each visit to their office. This attribute definitively skews toward the personal goodwill of the dentist in private practice. At the corporate level, without consistent dentist involvement, patients have no knowledge of the treating dentist's personal reputation, making it more of an enterprise goodwill attribute.

Comprehensive analysis required

Additional personal goodwill attributes exist beyond those outlined here. Retaining a dental practice evaluator for valuation purposes should always include analysis of personal goodwill attributes. Evaluations should not merely mention calculating personal goodwill using the dentist's production or compensation figures.

A thorough analysis of these attributes provides courts and arbitrators with the detailed information necessary to make informed decisions about goodwill allocation in dental practice valuations.

Bruce Bryen is a certified public accountant with over 45 years of experience. He specializes in providing litigation support services to dentists, with valuation and expert witness testimony in matrimonial and partnership dispute cases. Bryen assists dentists with financial decisions about their practice, practice sales, evaluating whether to join a dental service organization, practice evaluation during divorce proceedings, and questions about the future or financial health of dental practices. He can be reached at [email protected].