William Bruce, Accredited Business Intermediary and Senior Valuation Analyst
As the owner of a business advisory firm, I’m often asked about goodwill. My firm is involved in valuing and assisting clients in the transfer of ownership of small to medium size businesses. Goodwill is an issue we encounter in almost every engagement.
So what makes up the goodwill of a business? In my experience, these are some of the items that contribute to the value of goodwill.
Positive Cash Flow – From a business buyer’s perspective, there will be positive cash flow from the first day of ownership. This is opposed to starting a business from scratch, which most likely means an extended timeframe before the business turns a profit.
Trained Employees – There will be little time or expense needed in recruiting and training new employees. The employees are already in place, which will be a huge savings and an advantage is many ways.
Customer Base – Whether the business is retail, service, internet related or something else, there is already a customer base doing business with the company. This is one of the most important components of goodwill.
Reputation and Brand Recognition – This is invaluable. It would take years to establish this when building a new business from the ground up.
Systems – The business most likely has systems in place, whether written or common knowledge among the staff, on how to handle all the processes of the business. The new owner of the business will not be thrown into a “hit or miss” situation on every decision he or she will need to make.
Location – The location of the business has been proven advantageous over the years. A new and sometimes expensive search for a location isn’t necessary.
Easier Financing – For the buyer of a business, it’s much easier, by a long shot, to obtain a business acquisition loan to buy a business with an established track record of profits than it is to successfully pitch a banker or investors on a new business idea.
In summary, goodwill is classified as an intangible asset. This doesn’t mean it’s not real. It is very much real, and is factored into the value of every company.
It’s no wonder that the current trend among entrepreneurs is “expansion through acquisition.”
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