And how the wrong type of goodwill can actually decrease the value of your business…
What is Goodwill in Business?
And why it can harm the sale of your business.
“I never advertise, and we’re always busy”. I hear this a lot from business owners when discussing their business and its value on the market.
Unfortunately, this reputation results in a much lower market value of their business when it comes time to sell. Because when the owner leaves, so does the goodwill.
The term goodwill is generally misused or misunderstood.
Goodwill allows for a value representation of intangible assets. However, that’s too general an understanding for a business owner to have, if they want to sell their business for maximum value. And if your business carries the wrong type of goodwill, then it will actually decrease the value of your business.
Goodwill comes in three forms;
Some businesses enjoy a mix of all three, and some can depend on just one or none.
Commerical goodwill is by far the most valuable. Think notable brands; McDonalds, Riveria and Toyota.
Locational goodwill can be valuable, but it does not have the leverage of commercial goodwill.
Think of a service centre right next to a major motorway.
The location of this service station contributes far more value to the business than its ability to upsell each driver with a coffee.
That location would probably drive just as much business to the owners if it were a Shell, Mobil or Ampol service station.
The problem with locational goodwill is that revenue generated at that location is fixed to that location.
The value of the goodwill will reduce if the location’s future is at risk. For example, if the site is not secured by a long lease.
Personal goodwill is by far the hardest to sell. The diminished market value is because the business’s future success is too reliant on the owner’s network and reputation.
Suppose it is evident that your reputation has been responsible for a large portion of the company.
In that case, the business’s future ability to generate revenue is severely affected once you leave.
As a result, this scenario reduces the market value of your business.
It’s the age-old saying of two sides to every coin. What you think is helping your business during the day-to-day might end up harming it when it comes time to sell.
If you want to know more about what’s involved with selling your business, book an appointment here or email me directly at the details below.
I’ll tell you exactly what information you need to understand where your business sits in the market so you can make better business decisions regarding selling your business.
I’ll be happy to help you become clear on your next step to exit your business successfully for maximum value and in good time.