Goodwill in Business Deals

Many business owners don’t understand the concept of goodwill or how to calculate it. When a buyer is willing to pay a premium price for a business, far more than the company’s assets would typically dictate, that is considered goodwill.  Let’s take a look at what goodwill is and how a company can benefit from it when it comes time to sell:

What is Goodwill? 

Goodwill can be as simple as your company having an exceptional reputation and a very loyal base of customers. Often highly sought-after technology can be a part of goodwill.  In other cases, goodwill can be in the form of IP or desirable domain names. However, as you can imagine, it is difficult to put a specific price on these kinds of benefits.

When a business involving goodwill is sold, it can be very challenging to determine a fair amount for a business, since subjective values are involved.  In some cases, it can even be overvalued by the buyer.

The Case of Personal Goodwill

In some cases, a company’s goodwill is personal. This is often due to building personal goodwill with customers or clients. In these cases, the goodwill is not necessarily transferable. The business is associated with a person who is often the founder of the company. You will typically see this kind of situation with dental and doctor’s practices and law offices.

How Will this Impact the Sell?

So- how does personal goodwill impact the sale of the business?

What can work for the buyers and sellers is for the business owner to agree to stay onboard for a designated period of time.  This can help ease the transition to the new business owner.  In other cases, the buyer and seller arrange an “earn out.” Any lost business is factored at the end of the year, and then this percentage is subtracted from the amount owed to the seller. In some cases, funds are placed in escrow and adjustments are made depending on the performance of the business.

How We Can Help

If you are buying or selling a business that involves personal goodwill, your situation may be different from that of the majority of businesses. However, a Business Broker or M&A Advisor can guide you through the process and ensure that all parties are satisfied.

Copyright: Business Brokerage Press, Inc. & Otis Florence

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