What’s Your Goodwill Worth?
If tangible assets (land, buildings, plant, vehicles and stock) were all a business owned, valuing it would be a breeze. However, there are lots of intangible assets (assets you can’t see, touch, hear or smell) that are part of any business - working out the value of these is a bit trickier.
Intangible assets are copyrights, patents, intellectual property, business systems, good reputation and loyal customers. They are referred to as the ‘goodwill’ of a business and they’re usually where the real profit lies … and where the real value is ... when it comes to selling a business.
Goodwill is subjective and the vendor’s value will usually vary considerably from that of the potential purchaser.
To get the best price possible upon selling, you need to get an objective opinion from your Accountant (or someone experienced in business appraisals), at least a year before selling, so you can review and improve your systems.
Valuing Your Hours of Toil
Many small business owners assume the thousands of hours spent building up their business must equate to a certain value in the marketplace. Sorry, this means nothing to a purchaser – they’re not going to recompense you for your hard work. The value comes from the results of that labour - if you can show improvements to your business.
What they are going to pay you for is the future maintainable earnings of the company, based on, for example, the business’ market reputation, the customer base, the enthusiasm and training of staff and the business systems in place … the intangible assets.
Systems Improvement to Increase Goodwill
The valuation/appraisal may highlight areas where more attention is needed to either improve the overall business performance or to address oversights. In both cases the goodwill factor, and therefore the value of the business, can be enhanced by checking:
- Is your business based on efficient systems and do you have a business system manual explaining every function of the business?
- Have you developed particular marketing strategies, based on the differences in your customer makeup and are these documented?
- Do you maintain a detailed customer database and keep in regular contact with customers?
- Have you followed the legal procedures for registering trademarks or documenting ownership of intellectual property?
- Have you properly documented any trade secrets, recipes, formulas or agreements with suppliers?
- Can you renegotiate for a longer lease on your premises?
- Have you developed key contacts in negotiations for potential export markets and have these been documented?
Increasing the Goodwill for Your Business
If you’re thinking about selling your business, don’t leave it until the last minute to plan the event. You need expert advice and plenty of time to get the business ready:
- Have the business valued. Work with your accountant to draw up a list of these assets.
- Be realistic – your many years of hard grind may, in reality, add up to very little in terms of goodwill. More valuable will be your excellent planning, leadership, systemising, customer relations and the retention of highly trained, motivated employees.
- Ensure documentation is up-to-date – have you legally registered patents, trademarks and copyrights and do you have documentation to protect intellectual property?
- Demonstrate your future planning – potential buyers will want to know your plans for growth and the strategies in place to reach them. Business plans, performance indicators, marketing plans and an effective customer database are critical intangible assets.
- Get expert advice – don’t overlook the importance of professional advice from your accountant.
A purchaser may not recompense you for all the hours you spent growing your business, but he or she will definitely pay you for your intangible (and tangible) assets, if you’ve done the groundwork, as above. That kind of effort is always well rewarded.
