From time to time, I am in the unfortunate position of telling some 50-year old business owner that they “just don’t have any goodwill”.
“But we have been around forever, or our name is like a household word in the community, or we literally have thousands of customers” might be the seller’s response. I am constantly amazed at how little knowledge most business owners have of what their business is actually worth. They will follow their checking account, their investments, and the value of their house but won’t think anything of whether their business value is increasing from year to year. So, what then does this have to do with goodwill? To understand whether you have goodwill, you must first know the value of the business, in total. With that number at hand, it’s simple math. Business Value minus replacement value of the assets it takes to generate the given cash flow equals goodwill, or Intangible value (in other words a value you just can’t put your fingers on or touch). This intangible can also be called “blue sky” or “intellectual property”.
It really doesn’t matter who has been there the longest or whose name is the most recognized, the proof is always in the numbers. Many times, the business with the 50-year history or a recognized name “is” the one that will generate the biggest goodwill. Why? Because those businesses have found a way to beat the competition in a myriad of ways. Better systems in place, better marketing, more productive employees, trade secrets and the list can go on and on. You have goodwill…because…you have found a way to squeeze more profits out of every sales dollar, end of sentence.