In this video, we talk about "WHAT" it is you are actually selling. What is Goodwill and what does it really mean in the context of a business sale?
"Goodwill is not the relationship that the business has with it's community"
Watch our previous video WHY ARE YOU SELLING here:
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Transcript:
Last week we talked about when the time comes what will be your why? “Why” would you sell your business ? This week, what we are about to talk about can be the difference between hundreds of thousands of dollars when you go to sell your business and as experienced business brokers we have seen this play out many times over.
The biggest mistake business owners make when going to sell their business, is underestimating what information a buyer will be looking for, and the business owner ends up blindly promoting areas of the business to the buyer that they think are valuable.
The question is, will they be seen as valuable to the buyer who at the time knows nothing about your business? So 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, transferable assets of the business are. As a business owner, this can be really hard to work out, because you are connected to the business in such a deeper way. So let’s start with the most common asset – Goodwill.
Firstly let’s define goodwill, and being a business broker that see's real people make offers every week, we’ll start by dispelling a common myth. Goodwill, is not how the business is viewed in its community. 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. And they have worked really hard to bring the business to that point so they think that this is a really valuable, they think their business is rich in goodwill.
But if this community 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, if the business is profitable but the revenue is trending down, the business could actually have bad will.
Again, so much of a business sale is about timing. As business brokers we know that it's best to sell when the business is at it’s peak or growing towards it. If you can do this, 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.
Next week we are going to talk about the next major tangible, measurable and transferable asset that a buyer will be looking for – the plant and equipment.
Please share this video with anyone that you know is a business owner. From all of us at Vision Brokers and Advisors, thanks for watching and we look forward to working with you. Bye.