Does a Medical Practice Have Transferable Goodwill?

Goodwill, and the part a buyer can acquire

Goodwill is the value of a business above the market value of its identifiable net assets, meaning its separately identifiable assets less its liabilities. In practice, it is the expectation that patients will keep coming.

The Australian Taxation Office's Taxation Ruling TR 1999/16, reflecting the High Court's decision in FC of T v Murry (1998), describes goodwill as an indivisible item of property, legally distinct from the sources from which it emanates, and says it may be site, personality, service, price or habit that obtains custom. That matters here, because a medical practice draws patients from several of those sources at once and one of them, the doctor, walks out the door each evening.

TR 1999/16 puts the consequence plainly. Where a sole practitioner disposes of their business, the part of the goodwill emanating from their personality, reputation, skills or attributes is not transferable, and nor is the part emanating from key employees the purchaser does not engage. Other sources, including the habit or inertia of customers, keep drawing custom after that person has gone.

Hence two labels. Personal goodwill is earning capacity tied to an individual, which the ruling describes as inherently unique to that person and not capable of transfer. Transferable goodwill, also called commercial goodwill, stays with the practice under a new owner. Almost every practice has some of each, and the valuation question is the proportion. See what is goodwill in a medical practice.

The test: what happens to the billings if the principal leaves?

Every other question here is evidence for that one, and the most useful evidence is historical, because practices change doctors and the accounts record what happened. We look at billings by doctor, item and billing type over several years, then at the months after a doctor last left: how many of that doctor's patients rebooked with someone else, how many appointments went unfilled, and how long the room took to refill.

Where there is no departure to study, the appointment book substitutes for one. A practice whose patients take the next available doctor behaves differently from one whose patients wait a fortnight for a named practitioner.

The billing profile is part of the same evidence. Episodic, bulk-billed attendance at a convenient location generally attaches to the site and the opening hours, while a privately billed book of chronic-disease patients, care plans, procedural work or Department of Veterans' Affairs and workers compensation referrals usually attaches to the individual. We read item mix and billing type alongside volumes, not total fees.

Concentration matters as much as the total. A practice where one doctor produces most of the fees carries key-person risk, the risk that earnings depend on one individual, priced whether or not that doctor is the owner. See how practitioner dependence affects business value.

One thing never transfers. Services Australia issues a Medicare provider number to an individual practitioner, not to a practice. A buyer is not acquiring the right to bill, but the conditions under which practitioners holding their own numbers keep working at that address.

Solo practices, group practices and medical centres

A solo practice concentrates the sources of custom in one person, so the transferable share is usually smallest. It is rarely nil, because the site, the fitted premises, the records and the staff keep drawing patients after the founder goes. What a buyer will not pay for is the founder's own consulting income.

A multi-doctor practice changes the arithmetic, because no single departure removes the business. The analysis becomes a series of tests: remove the largest biller and see what remains, then ask whether the remaining doctors are bound by anything more than habit. Recruitment belongs in the same assessment, since transferable goodwill assumes a doctor can be found for the room. See the clinical workforce and healthcare business value.

A medical centre is a different business again. It earns fees for providing rooms, staff, systems and administration, so its goodwill attaches to its capacity to attract and hold both doctors and patients. A centre with a stable roster, a real patient base and a secure lease can carry substantial transferable goodwill even where no doctor is an employee.

Where does the goodwill sit in a service entity structure?

Many practices separate the clinical practice from the business supporting it. A service entity, usually a company or unit trust, holds the lease, fitout, equipment, software and administrative and nursing staff, and supplies them to practitioners under a services agreement for a fee, commonly a share of billings.

Where a practice is structured that way, the business being valued is normally the service entity, and its earnings are service fees rather than clinical fees. The transferability question becomes narrower and more answerable: will the doctors keep paying those fees under a new owner? The answer sits in the agreements: term and renewal, notice, how the fee is set and varied, exclusivity, restraints and change of control. A room full of doctors on arrangements terminable at short notice supports less goodwill than the same room on agreements with real term left.

The same documents decide a state tax question. Revenue NSW's Revenue Ruling PTA 041, issued on 11 August 2023 and shown as current at the time of writing, applies the relevant contract provisions of the Payroll Tax Act 2007 (NSW) to medical centres, including dental clinics, physiotherapy practices and radiology centres, that contract with practitioners to give patients access to their services. It records that in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue the NSW Civil and Administrative Tribunal held the typical agreement between the operating entity and its doctors was a relevant contract, and that a later appeal to the New South Wales Court of Appeal was dismissed.

The agreement terms weighed in that case read like a transferability checklist: rostered days including weekends, notice and approval for leave, an obligation to promote the operator's interests and not channel patients away from its business, adherence to the operator's protocols, and a restraint applying after the doctor departs. PTA 041 adds that a clause describing the practitioner as the principal does not prevent those provisions applying where the centre can exercise operational or administrative control over the services provided to patients or over the practitioner. Payroll tax rulings differ between states and any particular position is a matter for your accountant or lawyer, but the question underneath is the one a valuer asks: whose business are these patients attending? See payroll tax and medical practice value.

Who owns the patient list?

No one sells a patient list the way a retailer sells a mailing list. The Office of the Australian Information Commissioner's guidance on selling a business says a vendor must comply with the Australian Privacy Principles during due diligence and should avoid giving a prospective purchaser the names and other identifiers of its customers, while financial information, contracts and aggregated statistical customer information are generally available. Nor can a practice step around this by being small: the OAIC states the Privacy Act covers a health service provider regardless of turnover.

Buyer and valuer therefore work from aggregates: active patient counts on the practice's own stated definition, new patients, attendances, the spread across doctors and the age of the records. What passes on completion is custody of the records and the continuing relationship with the people in them, on the terms of the sale contract. The patient base is a source of goodwill, not a separately priced asset. See patient and referral concentration.

One formal link between patient and practice does exist. MyMedicare is a voluntary patient registration model, available to general practices that are accredited, or registered as working towards accreditation, against the National General Practice Accreditation Scheme. At the time of writing its Program Guidelines make the new owner of a registered practice a continuing entity only while the practice keeps adhering to MyMedicare policies and guidelines, including maintaining accreditation. That is transferability written into a program rule, worth checking early because registered patients and their incentives are part of what a buyer pays for.

Restraints, transition and the contract

A restraint of trade clause stops a vendor from taking back what was sold. TR 1999/16 describes its function as protecting the goodwill transferred, treats it as a CGT asset separate from that goodwill, and notes that its absence may be reflected in a lower price for goodwill. Enforceability varies between states and is a question for the parties' lawyers. A valuer assesses the restraint's practical reach: area, duration, activities covered, and whether the vendor could realistically compete.

Transition does similar work. A vendor who stays on for an agreed period, introduces patients to the incoming doctors and hands over gradually converts personal goodwill into something a buyer can hold, and deferred consideration tied to retention prices the same risk from the other side. Because TR 1999/16 treats goodwill emanating from key employees the purchaser does not engage as untransferable, the practice manager, nurses and long-serving reception staff count towards the transferable base only if they stay on.

The evidence a valuer asks for

Transferability is assessed from documents, not assurances. The material carrying most weight is:

• billings by doctor, item and billing type across several years, with the history of arrivals and departures
• the practitioners' agreements: term, notice, fee basis, exclusivity, restraint and change of control
• staffing and systems: roles, tenure, who runs the practice day to day, the practice management and clinical software, and recall processes
• accreditation certificates and program registrations, and the terms deciding whether they carry across
• the lease, since goodwill tied to a location depends on staying there: unexpired term, options and assignment provisions, covered in premises and lease terms
• for specialist practices, the spread of referrers, because a referral relationship usually attaches to the specialist rather than to the rooms

How the transferable share is turned into a number

We do not declare goodwill transferable or not. We quantify it in the earnings and in the risk.

The starting point is normalisation, restating reported profit to what an arm's length owner could expect. The owner's clinical and management time is replaced with the market cost of that work, because profit that exists only because the owner works below market rates is not profit.

That produces future maintainable earnings, the level of earnings the practice can reasonably be expected to sustain, usually expressed as EBITDA (earnings before interest, tax, depreciation and amortisation) or EBIT (earnings before interest and tax). Earnings attributable to a practitioner who will not be there afterwards, or is not bound to stay, are excluded or discounted here. See what is maintainable earnings.

Capitalisation of future maintainable earnings then applies a multiple to those earnings reflecting the practice's risks and growth prospects. Earnings that survive a departure carry less risk than earnings that do not, and the multiple reflects that. The right multiple depends on the practice, which is why a defensible valuation explains its reasoning rather than quoting a rule of thumb.

Transferability can be reflected twice, and should be counted once. If earnings have already been stripped back to what survives a principal's departure, the multiple should not be cut again for the same dependence. A report should say which side of the calculation carries the adjustment, or a reader cannot test the conclusion.

Where earnings are not settled enough to capitalise, a discounted cash flow may be used: cash flows are forecast period by period and discounted to a present value at a rate reflecting their risk. It suits a practice mid-transition, because the forecast can carry a recruitment ramp and the discount rate the risk that it does not happen, but it is only as reliable as the forecast.

Market evidence is used with care. Practice sales are private, reported prices rarely carry the adjustments that would make them comparable, and a headline figure often includes deferred amounts tied to the vendor staying and the billings holding up. A price is what particular parties agreed in their own circumstances. A valuation instead concludes market value at a stated valuation date, which the ATO describes as an asset's estimated monetary worth on the open market, based on its most valuable use and what a willing buyer and seller would agree at arm's length. See business valuation versus business appraisal.

Where transferable goodwill is minimal, value tends towards net assets: equipment, fitout, consumables, debtors and cash, less liabilities, on the basis that fits the circumstances, whether the practice keeps trading or its assets are realised. A conclusion at that level is not a criticism of the practice, but a statement about where its earnings come from.

An earnings-based conclusion is normally an enterprise value, the value of the business before borrowings, assuming a normal level of working capital comes with it: in a practice, mainly Medicare and patient receivables, consumables and accrued staff entitlements. Equity value, what an owner's interest is worth, deducts debt and adds surplus assets. See how to value a medical practice in Australia.

Does the purpose change the answer?

The analysis does not change. What changes is what the report has to demonstrate.

For a sale, the buyer is pricing the earnings that survive the vendor's exit, so the vendor's personal billings are usually addressed through transition arrangements and restraints rather than paid for outright. See sale and exit valuations and preparing a healthcare business for sale.

For family law, a property settlement needs a value for an interest at a valuation date, and the Federal Circuit and Family Court of Australia identifies property valuers and financial consultants among the experts who prepare reports in family law proceedings. Where earnings depend on continued personal exertion the transferable component is often small, and the report should say so and show its working so both parties and their lawyers can test it. See valuing a healthcare business for family law.

For tax and restructures, the standard is market value, and the ATO notes its definition may vary for particular provisions of tax law and types of asset. It expects a report setting out the purpose, scope, asset and date, whether the assessment is retrospective, the records explaining the basis of the value and the value itself, and that the instructing party states the fee does not depend on the outcome. Goodwill is usually reached as a residual: the value of the business as a whole, less the identifiable assets passing with it. If most of it is personal to a practitioner not moving to the new entity, the valuation records that. Tax consequences should be confirmed with your accountant. See tax and restructure valuations.

For a partner buying in or exiting, the same split decides whether that party is paying for a business or for their own future work. A parcel of shares or units carrying no control over distributions, recruitment or a sale may be worth less than the same proportion of the whole, so a valuation should state whether it reports a controlling or a minority interest. See internal transaction valuations and share and equity valuations.

Where this leaves a practice owner

Transferable goodwill is a proportion rather than a yes or a no, and it is observable. Practices carrying more of it share the same features: billings spread across more than one practitioner, agreements with term and restraint in them, a manager who is not the owner, systems that work without the owner present, accreditation that can travel and a lease long enough to matter. Each is documented, and each can be examined well before a transaction. For that assessment, request a valuation or read how medical practices are valued.