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How Valuable Is The Goodwill of Your Business?

June 14, 2012

Goodwill. What is it? Does your business have any? If so, how do you measure it? In simple words, goodwill can be synonymous with a “good-name,” “a good reputation” and/or “a wide business connection” which helps the business to earn more profits than that of a newly started business. Goodwill is an intangible, salable asset arising from the reputation of the business and its relations with its customers, distinct from the value of its stock and other tangible assets. Goodwill is a term that is used to reflect a portion of the market value of a business entity.

Historical academic and accounting icons, such as Professor Dicksee, describe goodwill: “When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts.” According to J. O. Magee “The capacity of a business to earn profits in future is basically what is meant by the term goodwill.” According to Lord Justice Lindley “The term goodwill is generally used to denote benefit arising from connections and reputation.” John Scott has defined goodwill as “Goodwill is nothing more than the probability, that the old customers will resort to the old place.” In the words of Lord Macnaghten, “Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of a business. It is the attractive force, which brings in customers. It is one thing which distinguishes an old established business from a new business at its first start.”

After reading that, you may be scratching your head wondering how something so seemingly vague and invisible can be assessed and valued as an asset of your business—something that a potential buyer would pay for. There are two common approaches to assessing a company’s goodwill. One uses historical financial data; the other considers the industry and region in which the company operates. Furthermore, it’s important when buying a business, that the goodwill is inherent in business itself, and is not based solely on the owner. Don’t underestimate the power of goodwill. Consider the limited physical assets of Facebook and the level of its goodwill. Then consider a company with a high value of physical assets but very limited goodwill. Which one is more likely to attract paying customers on a long term basis? Which one is more valuable? More salable?

BC Business Brokers have in-depth university training in the 12 common accounting methodologies of Business Valuation, in addition to understanding the impact of intangible assets (like goodwill) in the context of industry trends and geographical location. If you are contemplating the sale of your business, or considering small business ownership, contact the Sunbelt Nanaimo office – we can help you. We are licensed realtors specializing in business transactions and commercial property.

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