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Q&A: Goodwill

What constitutes goodwill?

Goodwill is the value of a business over and above the value of its tangible assets such as premises, equipment, stock, net debtors and bank deposits.

As such it is an intangible asset. It reflects how a business has grown over the years, the advantages of its location and the skills and reputation of the people involved, leading to an expectation of sustainable/increasing profit on behalf of a prospective purchaser for which they are prepared to pay.

For a GP practice key elements would be both practical and subjective and include:

-Surgery location and quality

-Skills of GPs and nurses

-Breadth of services offered and potential for development

-Quality of existing management

-Practice ethos – caring and welcoming partners and staff

How do you value it?

The most common ways of valuing goodwill are:

-As a percentage of annual income (turnover)

-As a multiple of annual profits

-As a percentage of a number of years averaged profit or income

As an example, if we assume that:

-A partnership has an average profit of £750,000 over the last three years with no significant variation

-The purchaser agrees to pay one year’s value of average profit for goodwill

-There are six partners sharing £750,000 – each receiving £125,000. (The profit on sale of goodwill is, of course, subject to capital gains tax).

For GP partnerships which hold a registered list based contract for essential services there are specific restrictions on the sale of goodwill (outlined below).

Is the sale of goodwill illegal?

It can be, yes. The sale of the goodwill of a medical practice which has a list of registered patients is not permitted under any circumstances.

It is possible to sell goodwill in relation to the provision of enhanced, out-of-hours and AQP services, but only if such services are provided through a separate legal entity (for example a company or LLP), which does not have a patient list.

Can I sell my practice to a private provider?

You can, but it’s not easy.

For some practices, particularly where all partners are of a similar age/close to retirement, the prospect of selling their practice to a private provider and remaining as salaried GPs is extremely tempting. At a stroke responsibility for managing practice finances is removed and your investment in the practice realised. Achieving this, however, is not necessarily easy. Remember that your GP contract is controlled by NHS England, or equivalent in the rest of the UK. Whilst you are able to vary your partners you cannot decide to pass your GP contract on to a third party.

Any negotiations with a private provider would have to take place in conjunction with NHS England or equivalent. If you are seriously considering this route your first step is to contact the contracts department of your local area team.

You should also consider your own security of employment if the sale is completed together with the contracting authority’s options regarding contract renegotiation and tendering.

Our newest partner cannot afford to buy the outgoing partner’s share of the practice. What are the different ways we can approach this problem?

The most common problem is if the new partner cannot afford or does not wish to buy a share of the surgery premises from the outgoing partner. This could place the burden of finding the money for the purchase on the continuing partners, depending on the terms of your partnership agreement.

You should first have a look at your partnership agreement to establish whether this point is dealt with (in which case, you should follow the process in your agreement).

If the partnership agreement is silent on the subject then it would be up to the continuing partners to negotiate the purchase of the outgoing partner’s share of the property. If suitable terms cannot be agreed, the outgoing partner will simply retain a share of the property together with his entitlement to a share of the notional rent.

If you have yet to admit a prospective new partner, then you could of course make it a condition of his admission that he purchases a share in the property, or give him a reduced share of the profits until such time as he does buy a share in the property.

We cannot afford to pay our outgoing partner his share of the capital and profits at the moment. Are we obliged to give it all back at once?

You might be. If you have a valid partnership agreement then it will set out how and when the outgoing partner’s share of the capital and profits will be paid, in which case you will have a contractual obligation to abide by the terms of your partnership agreement (but the terms may of course be varied with the outgoing partner’s consent).

If there is no partnership agreement then you will need to agree suitable terms with the outgoing partner. He may be amenable to receive payment in instalments.

If you are considering having a new partnership agreement prepared, then it would be wise to write in the timescales on which an outgoing partner will receive his or her share.

Richard Buono is a solicitor in the healthcare department of Blacks Solicitors LLP, Leeds, West Yorkshire.

Jean Heald is the medical services nanager at Hansons Chartered Accountants, Castleford, West Yorkshire.