Understanding goodwill

Have you considered how much your business is really worth? Many business owners struggle with understanding the true value of their business, limiting their perceived value to their tangible assets only.

In reality, the value of your business may be significantly more than just the assets that you can see or touch. That is because a business’ value should also take into consideration goodwill, which can be a tricky concept.

Goodwill is an intangible asset that gives you a competitive advantage such as a strong brand or reputation, and can be an immense part of the overall value of your business. It is the reason that you have loyal customers and the reason a purchaser may pay more than just the value of your business’ assets. It’s what gets customers through the door and just as importantly; it’s what keeps them coming back. Let’s look at a bakery as an example.

The business may operate from premises which you own, with a value of 200,000. The equipment and other fixtures are worth 40,000 and the stock has a value of 5,000. Therefore, the total value of this bakery is 245,000. Say this business has been in operation for many years and is well known, so when the owner puts this it on the market, the asking price is not 245,000, but 375,000.

So, why would someone be prepared to pay more for the business than the value of its assets?

Because people are prepared to pay a premium for future profits, which they can determine from historical sales and profits, the location of the business, an existing and loyal customer base, staff, relationships with the community, suppliers etc. All these contribute to the value of your business’ goodwill. In many instances the relationships a business holds with its customers is enough to sell on this strength alone. Potential purchasers of your business will take into account all of these factors, and many more when considering how much they will pay for your business.

Want to know more?

Learn more about maximising the profitability of your business by speaking with your local Westpac representative and attend one of our Introduction to Financial Management workshops next month May 24th to 26th to understand the practical ways you can maximise your profitability and cash flow.
This information is of a general nature and is prepared for your information and interest only. It does not constitute and should not be relied upon as financial advice. It is not intended to be comprehensive, and does not take account of the reader’s specific objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs and seek specific advice tailored to your circumstances.