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And … Medical Practice Good Will

[By Dr. Charles F. Fenton III JD PC]

© iMBA Inc. All rights reserved. USA.

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Good will should be protected in a sale of a practice because much of the value of such a practice is encompassed by the element of good will.  A medical  practice may include a building or suite of offices, either owned or leased; the equipment, furniture, and supplies on hand, records of patients, and other financial interests.

Propensity of existing patients

But, the biggest value of a practice is the propensity of existing patients to come to that location for medical services; and more recently, inclusion in insurance, hospital or third party provider networks.  The good will has been created by the practitioners who have provided those services in the past.  To the extent that patients have liked Dr. Washington and have been satisfied with his medical treatment, they will tend to come to his office after Dr. Adams has acquired the practice.  A large part of what Dr. Adams has paid for is the likelihood of transfer of that patient loyalty from Dr. Washington to him.

A necessary part of the sale of the practice then is a commitment from Dr. Washington not to compete with Dr. Adams in that location or nearby for some reasonable amount of time.  If Dr. Adams were not to require such a commitment from Dr. Washington, Dr. Washington would be free to open a new office across the street from the old one and attract the patients who were loyal to him in the old office to come to the new office.  Unless Dr. Adams only bargained for some second-hand equipment and shop-worn office space, he would not have gotten the good will he paid for.

Covenants not to compete

Covenants not to compete which are incident to the sale of a practice are favored by the law, almost universally enforced, and play a logical and necessary part of the sale or transfer of good will.  Disputes and litigation over these covenants arise when the seller tries to find a way to get around the commitment.

Example:

For example, “Yes, I signed the covenant not to compete with Dr. Adams, but my wife, Dr. Martha Washington did not.  She can start up a competing practice across the street from the old office.  She doesn’t use the business name “Washington Internal Medicine Associates” that I sold to Dr. Adams; she uses “Dr. M. Washington Internal Medicine, P.C.”  I don’t practice medicine in any way at her office; I just sit out in the waiting room and drink coffee and chat with the patients.”

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Reasonable terms

Sellers who try such tactics usually lose. In negotiating the sale of a practice, either as seller or buyer, use an attorney who is expert in the area of covenants not to compete.  Don’t use a real estate lawyer, your tax attorney, or your divorce attorney!  Don’t use your brother’s former college roommate just because he would do it cheap!  You would never have a psychiatrist set your broken leg; so pay for the appropriate specialist.  Make sure that the terms of the covenant are reasonable.  A covenant whose terms are draconian may be voided by a court, leaving the purchaser with no protection at all.

More:

1. Restrictive Medical Practice Covenants
2. Regarding Hospital Security and Financial Covenants
3. Establishing Your Medical Practice’s Fair Market Value

Assessment

With HMOs and the various managed care initiatives, ACOs, and PP-ACA with “skinny networks”- is good will still as important as it was in the FFS past?

Even More:

• Medical Practice as a Portfolio Asset Class?
• FREE WHITE PAPER [Is Medical Practice a New Asset Class?] from iMBA, Inc.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

• PRACTICES: www.BusinessofMedicalPractice.com
• HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
• CLINICS: http://www.crcpress.com/product/isbn/9781439879900
• ADVISORS: www.CertifiedMedicalPlanner.org
• FINANCE: Financial Planning for Physicians and Advisors
• INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
• Dictionary of Health Economics and Finance
• Dictionary of Health Information Technology and Security
• Dictionary of Health Insurance and Managed Care

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[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

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Filed under: Health Economics, iMBA, Inc., Practice Management | Tagged: business valuations, good will, Medical Practice Covenants, Medical Practice good will, Medical Practice’s Fair Market Value, William "Duffy" LaCava JD PhD | 2 Comments »