Business Valuation and Goodwill When It Comes to a Going Concern
Business valuation is essential in the selling and buying of any type of business. However, it is easy to overlook the importance of goodwill in the valuation. Indeed, it may even be the largest part of the value and yet, the most difficult to calculate. It is not the easiest thing to put a price tag on, but it cannot be ignored in setting the price.
The Role of Goodwill in the Business Valuation
It is the difference between the value of the business and the fair market value of the assets. If you use the capitalised exchange earnings formula in business valuation, then you estimate the fair market value of the assets and then decide on a fair value for the assets.
Goodwill is the extra payment you are willing to make as a buyer. As a seller, it is the extra payment you want to ask for your business in addition to the net assets. To determine the net assets, simply add up all the known assets and subtract the liabilities. Goodwill in business valuation provides a price tag for what the business is selling for as a going concern. The latter refers to the selling of a business with its supplier lists and arrangements, customer lists, processes in place, cash flow, and personnel arrangements.
When doing a valuation of the goodwill, consider factors such as the relationships with suppliers and customers, and whether or not such relationships are likely to continue with a change of ownership. Consider the intellectual property that provides the business with a competitive edge. Now, also consider the location of the business. If it has a superb location, then it is certainly worth paying more for.
However, a good location for one business may not be as great for another. Good visibility on a main road with signage opportunities and central location near customers, or a good location in a shopping centre with a high annual foot count all add to the value of the location.
If the location is excellent and a secure long lease is in place, then you can rest assured that the location will be a positive in the business valuation of a going concern. Good cash flow is important. The business debt should be zero.
Documented processes, policies, and systems that enable the new owner to buy, walk in, and trade add tremendous value, and thus increase the goodwill payable. Likewise, experienced and trusted staff that will stay on in the business should also be considered in the goodwill valuation. Add to such, the long-term outlook and sustainability of operations, and you get to the goodwill. The better the above, the higher the value of the goodwill. With any of the above lacking, the goodwill value drops.
Because goodwill is not concerned with tangible assets, it can be difficult to select an appropriate valuation method. It comes down to what a willing buyer is prepared to pay. Various calculation methods are used to determine the goodwill value.
The best way to ensure that you get a higher price for the going concern is to have a professional broker perform a business valuation with consideration of the goodwill as described above. Give us a call for assistance in valuation, marketing, and selling of the business.