by Ken Stein

    This article was originally published in The Productivity Institute (PI) Newsletter

While the answer to this goodwill question is a resounding “yes”, one of the most perplexing questions a business owner faces when he or she decides to sell their business is “what do I have to sell and what is it worth?”

Most owners are familiar with balance sheet assets such as cash, accounts receivable, inventory
and equipment and real estate.  But other valuable business assets may not appear on the company’s balance sheet.  Among them are such intangible assets as intellectual property…and business goodwill.  So, how do you value and monetize an asset that is not tangible, yet does contribute to income?

How do you monetize a sales process, know-how, customer lists, vendor agreements, training systems, technical process, distribution networks, and client relationships? How do you monetize your unique value proposition and all those proprietary methods and processes you use in order to conduct your business?

The answer is to properly value your business “goodwill”.  Owners may believe that the business has additional value simply because it is able to create new products and services, attract new customers, and acquire or merge with other businesses.  However, to properly provide a rationale for a valuation which includes business goodwill, either a Discounted Cash Flow method or Capitalized Excess Earnings method is used.     These methods are essentially a “time value of money” style of valuation.  And it is here where choosing a suitable capitalization rate and discount rate is the key to establishing value.

Remember, an evaluation of goodwill is called for not only when selling your company, but also when two businesses merge. This is when equity ownership needs to be allocated among the business owners. One way to do this is to allocate a portion of the assets being contributed as business goodwill.

Furthermore, when seeking credit or a bank loan, the value of your business assets should include business goodwill - which will always influence the lender’s decision.

Goodwill is therefore a very important aspect of your business that is often overlooked when trying to assess its true value.  Because it is difficult to quantify does not mean it should be ignored.  In some cases, it is people’s perception of a business – its goodwill – that can truly affect its degree of success (or failure).  Most importantly, goodwill demonstrates a necessary business component that should be reflected in its valuation.

Ken Stein, CFP®
Business Broker and Intermediary  
www.reliancestrategies.com
ken.reliance@gmail.com
www.linkedin.com/in/kennethsteincfp