"I get really nervous when a business owner begins talking about how great the reputation of their business is "
And why wouldn't they?
Any business owner deserves to be proud of their achievements, I understand how hard they have worked in bringing their business to such a point. They are certainly entitled to spruik their accomplishments that they worked so hard for. Though in the context of a business sale, how valuable is reputation?
"The biggest mistake business owners make when they go to sell, is underestimating what information a buyer will be looking for and the business owner ends up blindly promoting areas of the business they are personally proud of, when this can actually have the opposite effect"
Let's take a moment to think about what it is that you are actually selling? It’s so critical to be clear on what the real, tangible, measurable, assets of the business are. As a business owner, this can be really hard to work out, because you are so connected to the business and
in such a deeper way.
The most commonly assessed asset is goodwill. Firstly let’s define goodwill, and we’ll start by dispelling a common myth. Goodwill, is not how the business is viewed in its community - which by the way is virtually impossible to measure.
"The best way to define goodwill when selling a business is by looking at the revenue and profit of the business"
I hear so many business owners talk about the incredible reputation of the business, or brand, or how they have so many repeat customers, or how they sponsor local charities, or how they have so many followers. They have worked extremely hard to bring the business to that point so they think that this is really valuable, they think their business is rich in goodwill.
Though if this community that the business interacts with doesn’t spend enough at the business to cover operating expenses of the business, then how much goodwill does the business really have?
Well in the context of a business sale – the true answer is zero. So using the revenue and profit as the true indicator of goodwill, here is an example.
If the revenue is stable or increasing and the business is profitable, then there is measurable goodwill in the business. On the other hand, even if the business is profitable but the revenue is trending down, the business could actually have 'badwill'.
So much of a business sale is about timing. You want to sell when the business is at it’s peak or growing towards it.
If you can get the timing right and present the goodwill of your business clearly by focusing on demonstrating the revenue and profit instead of demonstrating “reputation”, you can achieve a substantially higher sale price.
Daniel Kogan
Senior Partner
Vision Brokers and Advisors
daniel@vbaaustralia.com.au
(m) 0401 620 918