3 Hard Truths About Goodwill Value
So, you’ve toiled your whole life – built your business on blood, sweat, and tears. What’s it worth? Two heart attacks and a divorce? It’s certainly cost you some sleepless nights so that must translate to some monetary value – right?
If you want reassurance, a wry chuckle or two, and to sleep soundly, read no further; the truth is rarely kind. If you’ve survived this long as an entrepreneur, however, it’s unlikely you bury your head in the sand.
The First Truth: ‘Goodwill’ is defined and valued by the Buyer and/or Commercial Lender – not you. Beauty is in the eye of the beholder, and if they are going to beholderin’ the loan, it’s theirs to determine. Buyers equate Goodwill with measurable success, reliability, and confidence in future earnings – demonstrated in the historical financial statements of the business.
The Second Truth: All the intangible assets – reputation, customer list, history, systems in place, long-term employees, logo, and so forth – are only worth what they contribute to cash flow. If those things aren’t generating a stronger bottom line for you now, why would the Buyer pay for more than the value of the tangible assets?
How does one arrive at Goodwill? Subtract the Market Value of Physical Assets (Inventory, FF&E, Property)
From the Market Value of Business (Usually based on a Comparable multiple of Cash Flow).
The Third Truth: The Buyer’s Tradeoff is a real thing. Think of it this way – how does the cost of your Goodwill compare to the cost of building a company from scratch? (Think legal fees, advertising, and carrying cost until break-even). Does the difference in values outweigh the intrinsic value a Buyer places on the creative opportunity to design their own logo, reputation, systems, etc.? If they feel that they can do it better for cheaper, you’re overvaluing your Goodwill.
Understand these truths now, and you’ll be able to better plan your exit. Taking a hard look at the Buyer’s viewpoint can give you the perspective you need to determine a realistic value, and reveal ways to improve it before your sale. Work with a Business Broker to get a current Broker Price Opinion for your business, and ask for an analysis of the best opportunities for improvement. Don’t wait – while building value is possible, it’s not easy, and it takes time. Start the work now, and by the time you’re ready to sell, the Goodwill value will be something to be proud of.∞