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When is goodwill not goodwill?

The annual accountants meeting with their clients is usually predictable, the usual discussion of the profitability of the practice, a review of their balances at the year end and some predictions of drawings and tax. Once in a while a question gets lobbed in that disturbs the pattern, commonly predicated by ' know this is a stupid question' and of course it rarely is.

This week, I visited a practice where a partner has retired in the year and a new partner will be buying in. The retiring partner is selling her fifth equal share of the premises at £360,000, (i.e a value for the building of £1,800,000). The new partner, once parity is achieved, is expected to buy the fifth share. His question, raised at the meeting was… how it was possible that I could condone such a criminal act! After a number of ever sharper intakes of breath, and pregnant pauses, I asked what he meant.

He explained that he had asked a local estate agent for a surgery valuation. The estate agent had told him that the building was probably worth £1,600,000, but it had limited use as a GP practice, and so a value of £1,400,000 would be more appropriate. This worked out at £280,000 per share. Dealing in goodwill, he said firmly, is a criminal act!   He would pay no more than £280,000 and anything more was goodwill.

So what is goodwill and what can you do with it? Goodwill is a complex issue, but there is limited guidance on the DoH website.

In simple terms, goodwill is the amount a purchaser is willing to pay over and above the value of the assets on question. What has not been taken into account by the new partner was the notional rent for this practice. The practice currently receives £125,000 and is expecting a review next year. A rental of £125,000 gave a return on £1,800,000 of 6.94% which was reasonable. Using his valuation of £1,400,000, he would be getting a return of almost 9% which would be high indeed. Since the return of 6.94% was not excessive I did not agree that goodwill was an issue here, but I expect this discussion has some way to go yet. For more information on buying in to premises see the feature Buying shares in GP premises.

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