Goodwill and Its Importance to Your Business

What exactly does the term “goodwill” mean when it comes to buying or selling a business?  Usually, the term “goodwill” is a reference to all the effort that a seller puts into a business over the years that he or she operates that business.  In a sense, goodwill is the difference between an array of intangible, but important, assets and the total purchase price of the business.  It is important not to underestimate the value of goodwill as it relates to both the long-term and short-term success of any given business.

According to the M&A Dictionary, an intangible asset can be thought of as asset that is carried on the balance sheet, and it may include a company’s reputation or a recognized name in the market.  If a company is purchased for more than its book value, then the odds are excellent that goodwill has played a role.

Goodwill most definitely contrasts and should not be confused with “going concern value.”  Going concern value is usually defined as the fact that a business will continue to operate in a fashion that is consistent with its original intended purpose instead of failing and closing down.

Examples of goodwill can be quite varied.  Listed below are some of the more common and interesting examples:

  • A strong reputation
  • Name recognition
  • A good location
  • Proprietary designs
  • Trademarks
  • Copyrights
  • Trade secrets
  • Specialized know-how
  • Existing contracts
  • Skilled employees
  • Customized advertising materials
  • Technologically advanced equipment
  • Custom-built factory
  • Specialized tooling
  • A loyal customer base
  • Mailing list
  • Supplier list
  • Royalty agreements

In short, goodwill in the business realm isn’t exactly easy to define.  The simple fact, is that goodwill can, and usually does, encompass a wide and diverse array of factors.  There are, however, many other important elements to consider when evaluating and considering goodwill.  For example, standards require that companies which have intangible assets, including goodwill, be valued by an outside expert on an annual basis.  Essentially, a business owner simply can’t claim anything under the sun as an intangible asset.

Whether you are buying or selling a business, you should leverage the know how of seasoned experts.  An experienced business broker will be able to help guide you through the buying and selling process.  Understanding what is a real and valuable intangible asset or example of goodwill can be a key factor in the buying and selling process.  A business broker can act as your guide in both understanding and presenting goodwill variables.

Copyright: Business Brokerage Press, Inc.

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Determining Your Company’s Undocumented Value

Business appraisals are not one-dimensional.  In fact, a good business appraisal is one that factors in a wide range of variables in order to achieve an accurate result.  Indisputable records ranging from comparables and projections to EBITDA multiples, discount rates and a good deal more are all factored in.

It is important to remember that while an appraiser may feel that he or she has all the information necessary, it is still possible they have overlooked key information.  Business appraisers must understand the purpose of their appraisal before beginning the process.  All too often appraisers are unaware of important additional factors and considerations that could enhance or even devalue a business’s worth.

There Can Be Unwritten Value

Value isn’t always “black and white.”  Instead, many factors can determine value.  Prospective buyers may be looking at variables, such as profitability, depth of management and market share, but there can be more that determines value.

Here are some of the factors to consider when determining value: How much market competition is there?  Does the business have potential beyond its current niche?  Are there a variety of vendors?  Does the company have easy access to its target audience?  At the end of the day, what is the company’s competitive advantage?  Is pricing in line with the demographic served?  These are just some of the key questions that you’ll want to consider when evaluating a company.

There are Ways to Increase Both Valuation and Success

No doubt, successful businesses didn’t get that way by accident.  A successful business is one that is customer focused and has company-wide values.  Brian Tracy’s excellent book, “The 100 Absolutely Unbreakable Laws of Business,” notes that it is critical for businesses to have a company-wide focus on three key pillars: marketing, sales and, of course, revenue generation.  Tracy also points out that trends can be seen as the single most vital factor and bottom-line contributor to any company’s success and, ultimately, valuation.  For 2018 and beyond, projected trends include an increase in video marketing, the use of crowdfunding as a means of product validation and more.

No Replacement for Understanding Trends

If a company doesn’t understand trends, then it can’t understand both the market as it stands and as it may be tomorrow.  Savvy business owners understand today’s trends and strive to capitalize on the mistakes of their competitors while simultaneously learning from their competitors’ successes.

Tracy accurately states that while there are many variables in determining value, finding and retaining the best people is absolutely essential.  One of the greatest assets that any company has is, in the end, its people.

Copyright: Business Brokerage Press, Inc.

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The Importance of Understanding Leases

Leases should never be overlooked when it comes to buying or selling a business.  After all, where your business is located and how long you can stay at that location plays a key role in the overall health of your business.  It is easy to get lost with “larger” issues when buying or selling a business.  But in terms of stability, few factors rank as high as that of a lease.  Let’s explore some of the key facts you’ll want to keep in mind where leases are concerned.

The Different Kinds of Leases

In general, there are three different kinds of leases: sub-lease, new lease and the assignment of the lease.  These leases clearly differ from one another, and each will impact a business in different ways.

A sub-lease is a lease within a lease.  If you have a sub-lease then another party holds the original lease.  It is very important to remember that in this situation the seller is the landlord.  In general, sub-leasing will require that permission is granted by the original landlord.  With a new lease, a lease has expired and the buyer must obtain a new lease from the landlord.  Buyers will want to be certain that they have a lease in place before buying a new business otherwise they may have to relocate the business if the landlord refuses to offer a new lease.

The third lease option is the assignment of lease.  Assignment of lease is the most common type of lease when it comes to selling a business.  Under the assignment of lease, the buyer is granted the use of the location where the business is currently operating.  In short, the seller assigns to the buyer the rights of the lease.  It is important to note that the seller does not act as the landlord in this situation.

Understand All Lease Issues to Avoid Surprises

Early on in the buying process, buyers should work to understand all aspects of a business’s lease.  No one wants an unwelcomed surprise when buying a business, for example, discovering that a business must be relocated due to lease issues.

Summed up, don’t ignore the critical importance of a business’s leasing situation.  Whether you are buying or selling a business, it is in your best interest to clearly understand your lease situation.  Buyers want stable leases with clearly defined rules and so do sellers, as sellers can use a stable leasing agreement as a strong sales tool.

Copyright: Business Brokerage Press, Inc.

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What Do Buyers Really Want to Know?

Before answering the question, it makes sense to first ask why people want to be in business for themselves. What are their motives? There have been many surveys addressing this question. The words may be different, but the idea behind them and the order in which they are listed are almost always the same.

  1. Want to do their own thing; to control their own destiny, so to speak.
  2. Do not want to work for anyone else.
  3. Want to make better use of their skills and abilities.
  4. Want to make money.

These surveys indicate that by far the biggest reason people want to be in business for themselves is to be their own boss. The first three reasons listed revolve around this theme. Some may be frustrated in their current job or position. Others may not like their current boss or employer, while still others feel that their abilities are not being used properly or sufficiently.

The important item to note is that money is reason number four. Although making money is certainly important and necessary, it is not the primary issue. Once a person decides to go into business for himself or herself, he or she has to explore the options. Starting a business is certainly one option, but it is an option fraught with risk. Buying an existing business is the method most people prefer. Purchasing a known entity reduces the risks substantially.

There are some key questions buyers want, or should want, answers to, once the decision to purchase an existing business has been made. Below are the primary ones; although a prospective buyer may not want answers to all of them, the seller should be prepared to respond to each one.

  • How much is the down payment?  Most buyers are limited in the amount of cash they have for a down payment on a business. After all, if cash were not an issue, they probably wouldn’t be looking to purchase a business in the first place.
  • Will the seller finance the sale of the business?  It can be difficult to finance the sale of a business; therefore, if the seller isn’t willing, he or she must find a buyer who is prepared to pay all cash. This is very difficult to do.
  • Why is the seller selling?  This is a very important question. Buyers want assurance that the reason is legitimate and not because of the business itself.
  • Will the owner stay and train or work with a new owner?  Many people buy a franchise because of the assistance offered. A seller who is willing, at no cost, to stay and to help with the transition is a big plus.
  • How much income can a new owner expect?  This may not be the main criterion, but it is obviously an important issue. A new owner has to be able to pay the bills – both business-wise and personally. And just as important as the income is the seller’s ability to substantiate it with financial statements or tax returns.
  • What makes the business different, unique or special?  Most buyers want to take pride in the business they purchase.
  • How can the business grow?  New owners are full of enthusiasm and want to increase the business. Some buyers are willing to buy a business that is currently only marginal if they feel there is a real opportunity for growth.
  • What doesn’t the buyer know?  Buyers, and sellers too, don’t like surprises. They want to know the good – and the bad – out front. Buyers understand, or should understand, that there is no such thing as a perfect business.

Years ago, it could be said that prospective buyers of businesses had only four questions:

  1. Where is the business?
  2. How much is it?
  3. How much can I make?
  4. Why is it for sale?

In addition to asking basic questions, today’s buyer wants to know much more before investing in his or her own business. Sellers have to able to answer not only the four basic questions, but also be able to address the wider range of questions outlined above.

Despite all of the questions and answers, what most buyers really want is an opportunity to achieve the Great American Dream – owning one’s own business!

Key Factors on the Acquirer’s Side

There are several key factors on the acquirer’s side of a sale, most of which are necessary to achieve a successful closing. Just as a seller has to deal with quite a few factors, the acquirer must also. Some of the more important ones on the acquisition side are:

  • Sufficient financial resources to complete the deal as specified.
  • Depth of capable staff to run the existing business and also execute an acquisition at the same time.
  • A rational approach to the type, size and geographic location of target companies.
  • The willingness to “pay-up” for acquisitions such as 6x EBITDA and, if necessary, the willingness to pay 100% cash, whether the sale is one of assets or a stock transaction.
  • Assuming the acquisition search generates satisfactory deal flow, a willingness to stay the course for 6 to 12 months in the search process.
  • A confirmation by the board of directors of their commitment to complete a deal.
  • A “point person” in the search process, preferably the CEO, CFO or Director of Development who is reachable on a daily basis to discuss relevant matters.
  • Complete access to sales manager and others by the business intermediary to discuss suggestions of target companies.

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Questions to Consider for the Serious Buyer

A serious buyer should have the answers to the following questions:

  • Why are you considering the purchase of a business at this time?
  • What is your time frame to find a suitable business?
  • Are you open-minded about different opportunities, or are you looking for a specific business?
  • Have you set aside an amount of capital that you are willing to invest?
  • Do you really want to be in business for yourself?
  • Are you currently employed or unemployed?
  • Are you the decision maker, or are there others involved?

The real key to being a serious buyer, however, is whether the individual can make that “leap of faith” so necessary to the purchase of a business. No matter how much due diligence a buyer performs, no matter how many advisors there are to advise the buyer, at some point, the buyer has to make a leap of faith to purchase the business. There are no “sure things” and there are no guarantees. If a buyer is not comfortable being in business, he or she should not even contemplate buying one.

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Advantages of Buying an Existing Business

1. Established.

An existing business is a known entity. It has an established and historical track record. It has a customer or client base, established vendors, and suppliers. It has a physical location and has furniture, fixtures, and equipment all in place.  The term “turnkey operation” is overused, but an existing business is just that, plus everything else. New franchises may offer a so-called turnkey business, but it ends there. Start-ups are starting from scratch.

2. Business Relationships. 

In addition to the existing relationships with customers or clients, vendors, and suppliers, most businesses also have experienced employees who are a valuable asset. Buyers may already have established relationships with banks, insurance companies, printers, advertisers, professional advisors, etc., but if not, the existing owner does have these relationships, and they can readily be transferred.

3. Not “A Pig in a Poke”. 

Starting a new business is just that: “a pig in a poke.” No matter how much research, time, and money are invested, there is still a big risk in starting a business from scratch.  The existing business has a financial track record and established policies and procedures. A prospective buyer can see the financial history of the business — when sales are the highest and lowest, what the real expenses of the business are, how much money an owner can make, etc. Also, in almost all cases, a seller is more than willing to stay to teach and work with the new owner — sometimes free of charge.

4. Price and Terms.  

The seller has everything in place. The business is in operation and a price is established. Opening a new business from scratch can be the proverbial “money pit.”  When purchasing an established business, the buyer knows exactly what he or she is getting for his money. In most cases, the seller is also willing to take a reasonable down payment and then finance the balance of the purchase price.

5. The “Unwritten” Guarantee.

By financing the purchase price, the seller is saying that he or she is confident that the business will be able to pay its bills, support the new owner, plus make any required payments to the seller.

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