Well then by this definition, goodwill becomes any dollar you pay for the practice above and beyond the hard asset value.
So then how do you value it? I don't think you can because its value is directly related to the price that a buyer is willing to pay.
A practice that has a hard asset value of $200000 and sells for $500000 essentially has a good will value of $300000. But if someone else comes along and is willing to pay $600000 for the same practice, then the good will is now valued at $400000.
This is why the way I always value these situations is:
How much money do I reasonably need to live? Will this practice generate enough of an income for me quickly enough to allow me to pay the note and still reasonably live?
Well, . . . you're right. Valuing goodwill is imprecise and therefore difficult. And naturally sellers sometimes want more for goodwill than many buyers think is fair. And it
is the difference between the
net hard asset value and the selling price, unless of course it isn't. Making sure it is valued fairly and getting the seller to see that is the job of the dutiful buyer, no?
What does one buy when buying a going practice? One thing is the benefit of walking into the new practice and being busy straight away. In essence, that is the goodwill. It is the difference in value between starting out not busy and starting out busy (meaning getting paying work, of course.) The busier you are with well-paid work, the more valuable the goodwill, and conversely, the less busy, the less valuable the goodwill. In a highly competitive area, starting out busy is worth more, because it is presumably harder to do, while in an underserved area, getting busy without help might be easier, and so "goodwill" is comparatively less valuable.
If, for example, starting out "cold" gives you $300,000 less first year gross income and $150,000 less second year income than otherwise, then "buying" goodwill is related to that lost income--related, not equal to that income difference--you wouldn't pay $450,000 just to earn $450,000. Remember, the income is for your work that you do. So the value of the goodwill might be seen as the value of whatever promotional activity you might have to pay for to generate the same amount of business volume in your practice at the outset of your practice. As time goes by, your practice enjoys your own earned-in goodwill which eventually "replaces" the goodwill you started out with that came from your seller, or at least that is what you hope for.
So how to put a dollar figure on that? Some writers have suggested an indeterminate value based on the performance of the practice after it changes hands. That goes to the issue of alienability of the seller's goodwill, the business that will remain with the new owner after the old owner leaves.
Unless there is no other practice for patients to go for care, there is usually some attrition. Also, some business may come or go not due to the reputation of the practice but due to insurance contracts changes among the patients in a community. A practice that does not broadly accept plans might find itself on the outside with patients transferring if a major local employer changes health plans. I can't tell you how many colleagues have related the story of running into a patient in public who says " Oh we loved coming to your office, but our insurance changed so we can't . . ." when the difference in costs to them on a biannual exam might have been all of $20. What is the "value" of goodwill there? Obviously not $20.