Christmas is almost upon us and as such we are fast approaching the ‘season of goodwill’ but what is ‘goodwill’?
Apart from the obvious feeling towards our common man or woman and festive connotations, we often get asked when valuing a business ‘what is goodwill, what is it worth and how do you calculate it?’.
Goodwill is an intangible asset – you can’t touch or feel it like a tangible piece of equipment or building, but it can be equally, or in some cases more important. Take Apple or Coca Cola as brands, which carry huge history and product expectation, this is their intangible asset.
Back to earth, our goodwill calculation for say pubs, cafés, guesthouses and leisure parks are broadly based on the longevity of a business, ie how long it has been trading, what customer satisfaction levels they have (as measured via Trip Adviser etc and, of course, repeat custom) and how transferrable the business is in terms of the skill set required to maintain the net profit.
To ascertain the value of goodwill, first we calculate the adjusted net profit – after adding back any personal loan and motor expenses, leasing costs, depreciation and exceptional renewals. From this we apply a ‘goodwill multiplier’ (not a terminology you hear every day), which can have a range from 0.5 up to seven or eight times the adjusted net profit, so the variance is very broad and therefore has to be considered carefully, especially with a lease transaction, where the valuation of a business is largely based on the goodwill alone. Clearly it is very important to get this right. Thankfully our formal valuation colleagues gather similar data and over the years between us we are able to build a detailed knowledge of goodwill multipliers applicable to certain sectors and types of business.
Even then there are exceptions. For example, businesses such as butchers and hairdressers where there is a higher level of personal application to delivering the product or service are a bit more tricky to value when it comes to calculating the goodwill factor.
Is valuing goodwill a science? To a degree yes, but then again there is no one goodwill multiplier applicable to every café operating on the high street in Falmouth.
Is it an art? No, in the sense that it is founded on empirical data, but yes because experience along with sector and market knowledge play in a role in determining the value of goodwill.
In reality both science and art play a role as valuing goodwill often represents one of the most challenging (and debated) elements of formulating a business valuation for sale purposes.
So enjoy the season of goodwill. Buying or selling a business during the festive season can often prove to be very good timing.
If you are thinking of selling or buying we would be delighted to offer you our expert advice.
Simply call me, Graham Timmins, on 01872 247019 or email me via email@example.com
Seasons greetings to one and all!