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The author is a practice management consultant, appraiser, and broker in Santa Rosa, CA.
This is a good example of why buy-ins should be negotiated in advance.
Q: I am an internist who has been working with a cardiologist for five years. When it came time to discuss a partnership, the cardiologist said he wanted to charge me for "buying into" the practice, i.e. paying for the "goodwill" that he has built through the years since he started the business. Isn't goodwill an outdated concept? What about my "sweat equity" and recognizing that part of the value of the practice is due to my five years there?
A: This is a good example of why buy-ins should be negotiated in advance. Employees generally do not earn "sweat equity" in the ownership of their employers' businesses, even though much of a business's value is often built upon the labor of employees. The concept of "goodwill" as part of a practice's intangible value is still alive and well-mostly in cases in which there are "dividends" to ownership above compensation for labor. For example, for an internal medicine practice in which buying it would yield the purchaser an extra $500,000 in annual income, it inarguably has "goodwill" value. It takes an expert medical appraiser to determine the practice's actual value, as well as negotiations to agree on the actual price.