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One way of finding out the value of your company is by measuring its goodwill. This is a measurement of what is considered an intangible fixed asset because its value is difficult to measure monetarily.
There are two types of goodwill in the business world—personal and commercial. The main difference between the two is that one type of goodwill is associated with the business owner rather than the company as a whole.
Personal goodwill is what the business owner brings intellectually to their company. Examples of personal goodwill are your expertise, your relationships with clients, and your leadership skills.
If you are indispensable to your business, you have a lot of personal goodwill. However, this can actually work against you when it comes to selling your business. Personal goodwill can bring down the value of your company. If the business is unable to function well without you, the buyer will see this as a high risk situation and will be less likely to make a reasonable offer.
If someone buys your business and you end up disliking having to work with this person or you decide to retire, then the business buyer loses one of the biggest factors of success in the business. A business without its biggest asset makes it worth significantly less. This is why a buyer may shy away from a deal that involves a business which revolves a high reliance on your own ability.
Of course, it is not a bad thing to have personal goodwill as a company owner. Chances are that this is what has helped your company prosper over the years. However, if you are considering selling a business, you should think about ways to transfer your expertise into commercial-goodwill.
One way that you can do this is by allocating your expertise and skills to your other employees. If, for example, you are the company’s salesperson, then hire an in-house salesperson or train an employee to do this task as efficiently as you do.
Spreading out your value among the company will help your business be more appealing to buyers.
On the other hand, commercial goodwill is built into the business itself, and is separate from the owner. The brand name is a good example of goodwill (unless it is something like a law firm, where the business name is tied to the owner). Other examples of commercial goodwill include the business’ phone number, its location, reputation, patents, vendor list, etc.
Commercial goodwill will raise the value of your business because it can be transferred from owner to owner. The business should not be dependent on the personal goodwill of its owner, rather should have a high value of commercial goodwill. This will raise the asking price of your company.
Commercial goodwill is the difference between a sale price equivalent to your revenue and a much higher pay-out.
Above are some things to consider when are considering selling your business. At George & Company, we will give you a complete business valuation and provide you with advice on how to raise this value. One of the best ways to improve the value of your business is by creating a lot of commercial goodwill as well as making yourself disposable to the company.
If you would like a business appraisal or assistance in selling your business, please contact us in complete confidence.