In part one of this two-part blog series, we went over some of the basics on what’s known as business goodwill. An intangible asset, but one that’s still hugely valuable in numerous settings nonetheless, goodwill covers areas like reputation and relationships – and will often play a significant role in business sales, among many other areas.
At Utah Business Consultants, we’re happy to offer a wide range of services to those looking to buy or sell a business, including everything from basic exit planning to business valuation, sale terms and the role of goodwill in any part of these proceedings. What exactly is the value of goodwill within many business settings, and how has it evolved over the years into what it is today? Here’s a primer in part two of our series.
The Value of Goodwill
We went over all the various types of business goodwill in part one – there are several, from personal goodwill with those you work with to business goodwill based on the company’s name value and reputation. While reading this, you may have been wondering: Okay, but what tangible value can I place on this sort of thing?
While there aren’t necessarily industry standards here, as goodwill varies between situations and may or may not hold major value, one method to consider is the cash flow method. This involves subtracting the value of your tangible assets from your projected or historical cash flow – whatever dollar figure is left over represents your business goodwill. This is not a perfect method, as some businesses will vary in terms of how their cash flow compares to their overall value, but it’s a broad way of grasping roughly how much more your business is worth than your known assets.
Variables in Goodwill
There are a number of different distinct variables that might play a role in business goodwill:
- The quality and track record of management
- Strength of the local economy, specifically in the industry the business serves
- Loyalty of the customer base to the company and brand
- Good relationships with various suppliers and vendors
- Trademarks, patents, copyrights and related areas
- Specialized training and employee know-how
During any prospective sale, these factors will be highlighted to potential buyers.
How It’s Evolved
Over the years, the financial world has changed the way goodwill is viewed. Specifically, there’s been a shift toward the kinds of intangible assets that goodwill represents being more heavily recognized in business – areas like intellectual property and brand names are all considered part of goodwill today as well. While a big part of any business value remains its tangible assets, the value of goodwill plays a bigger and bigger role, not only in transactions but in the ultimate valuation of businesses that are sold.
For more on business goodwill and how it impacts potential business sales or purchases, or to learn about any of our business brokerage services, speak to the staff at Utah Business Consultants today.