Goodwill - The Most Valuable of Business Assets HTML version

The most valuable of business assets!
Part 1 – What is Goodwill?
Let’s start with: “Why is it the most valuable of business assets?”
Because you, the small business owner or manager, can create it from
nothing and for very little or no cost! By the application of sound
principles and a degree of persistence you can create an asset of
enormous value.
So, what is goodwill?
The simplest definition of goodwill is that it is the amount that a
purchaser of a business is prepared to pay for it in excess of the value of
its other assets less its liabilities.
Let’s take a restaurant as an example.
The business may operate from premises that have a value – a “bricks
and mortar value” – of say $250,000. The equipment, fixtures and
fittings of the business may be worth $40,000. It may carry stock of
$10,000. That’s a total value of $300,000. But if the restaurateur, who
has done very well out of his business and wishes to retire from it, puts
it up for sale he may market it with an asking price of, say, $550,000
and after negotiating with various potential purchasers may eventually
do a deal to sell it for $525,000.
Why is this, you may ask yourself? Why would anyone pay more for a
business than the (apparent) value of its assets?
Well, there’s much more to the business than those tangible assets.
There is the position of the premises, the customer base, the turnover
and the profitability. There is also the influence of the present owner on
the business and the ability of the business to continue producing
profits without his hand on the helm. The potential purchaser will take
into account all of these in considering how much he will pay for the
business and pitch his offer accordingly.
You can see from the above that there can therefore be (at least) three
different types of goodwill:
1. That attaching to the location of the business. Unless the
business is mobile – e.g. an ice cream sales van – there may be