How important is it, as a dentist or physician, to ensure that enterprise goodwill versus personal goodwill is accurately understood by the parties conducting valuations during divorce proceedings? The short answer is "very important."
The longer answer provides more perspective on why this distinction is so critical, especially in equitable distribution states. Community property states divide all assets 50-50 regardless of how the goodwill is characterized. This article explains why the distinction between personal goodwill and enterprise goodwill is so critical in equitable distribution states.
Personal goodwill vs. enterprise goodwill
Bruce Bryen, CPA, CVA.
Personal goodwill in a dental practice is the value attributed to the individual dentist's reputation, skills, relationships with patients, and his or her professional standing in the community. This type of goodwill is inherently tied to the dentist as an individual and cannot be easily transferred or sold separately from the dentist.
Examples of personal goodwill include a dentist's specialized training, their years of experience, their unique clinical techniques, patient loyalty based on personal relationships, and his or her professional reputation in the dental community.
Enterprise goodwill, on the other hand, refers to the value of the dental practice as a business entity -- independent of any single individual. It includes factors such as the practice's established location, brand recognition, trained staff, business systems and processes, patient base that is loyal to the practice rather than an individual dentist, and contractual relationships with insurance companies or other entities. Enterprise goodwill can be transferred when the practice is sold and represents value that exists beyond the personal attributes of the owner-dentist.
The distinction between these two types of goodwill becomes particularly important during divorce proceedings, because they are treated differently in property division. In many jurisdictions, personal goodwill is considered a personal asset that cannot be divided, while enterprise goodwill is considered a marital asset subject to division.
This distinction can significantly impact the practice's valuation and the ultimate distribution of assets in a divorce settlement. For dental practices owned by a dental service organization (DSO), the enterprise goodwill component is typically much larger than in solo practices, as the business infrastructure, brand, and systems are more developed and transferable.
Understanding and properly documenting the division between personal and enterprise goodwill requires careful analysis by qualified business valuators who understand the dental industry. Factors they consider include employment contracts, noncompete agreements, the transferability of patient relationships, the practice's reliance on the owner's personal reputation versus institutional factors, and the practice's ability to continue operating successfully without the owner-dentist.
In equitable distribution states, when determining the distribution of a dental practice's value, the personal goodwill of the dentist is critically important. A hypothetical example would be if the dental practice is worth $3 million and the clinician's personal goodwill was $500,000. The amount therefore would be $2.5 million to be divided equally in an equitable distribution state, leaving the remainder of $500,000. That distribution to the spouse and the dentist to be determined by the courts --according to the definition of equitable -- allows courts a lot of discretion.
It is therefore critically important to educate the evaluator to ensure they understand personal goodwill, especially for a dental practice, so that equitable distribution is not used for all of the goodwill. It should be noted that in most states, the distinction between personal goodwill and enterprise goodwill is not as important as in those states that use equitable distribution.
Employment contracts, the number of practices owned by the dentist, and other attributes of goodwill can help bolster the argument that there should be a larger amount of the goodwill value allocated to personal goodwill compared to the enterprise goodwill. Categories such as the administrative duties, marketing, personnel decisions, and other areas of importance can be quantified as either personal goodwill or enterprise goodwill.
As an example, if the dentist-owner determines the administrative duties and determines how much of an allocation is attributed to personal goodwill and how much is attributed to enterprise goodwill, obviously, if the dentist is the primary person responsible for the administrative duties, then this attribute would weigh heavily toward personal goodwill. With dental practices owned by a DSO, as an example, there is a separate division or company responsible for the administrative duties. This attribute would then weigh heavily toward being allocated primarily to the enterprise goodwill.
Another example would be the marketing effort. If the owner is predominantly displayed on websites, newsletters, and other marketing efforts, then the marketing attribute would be primarily one of a personal goodwill nature. Enterprise goodwill having a marketing attribute would imply not using the owner of the dental practice but its employees and the multiple ways the practice can assist the community.
If you are a dentist and need a dental practice evaluation for a sale, divorce, or estate planning, make sure that your evaluator understands the importance of personal goodwill and enterprise goodwill.
Bruce Bryen is a certified public accountant with more than 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].
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
