This question is often a potential buyer’s first response when given the price of a business – often accompanied with an expression of astonishment. Especially when a very profitable business has few tangible assets. The difference between the actual physical assets and the asking price is often called “blue sky.” Goodwill has often been a prime force behind the blue sky concept; goodwill has been called many things – very few of them good
Today’s goodwill is more than just the hard work and effort a business owner has put into building the business. The Web site name alone may be worth a lot of money. It’s important to remember that the name recognition or brand name, which is widely known and respected and produces the profits and cash flow, is where the real value lies.
The goodwill of a business can include patents, copyrights, its Web site and/or domain name, licenses, trademarks, proprietary software, secret recipes (here in Kentucky, think of Colonel Sanders’ secret eleven herbs and spices), royalties – the list goes on and on. Would a McDonald’s business, assuming the same sales and profit, have the same value if the name and franchise were not included?
Buyers are beginning to realize that much of the value of a business in today’s world is not to be found in the hard assets such as the fixtures and equipment, but in the intangibles that create the income.
For those who are considering selling their business in the near future, this new emphasis on goodwill means that some business procedures need to be changed. Operations manuals should be copyrighted, Web sites and domain names should be protected, product and specific service names should be trademarked, inventions patented.
There needs to be emphasis placed on intangibles that have to be earned, such as name recognition, brand names, employees, business relationships with suppliers and customers, long-term advertising, reputation, etc. Don’t let anyone tell you that goodwill doesn’t have value – it is most likely the most valuable asset of your business.
Goodwill should be as protected as the law will allow. A visit to an Intellectual Property attorney may well be the best investment a seller can make.
For someone considering buying a business, make no mistake about it, in many cases, what you are really buying is the goodwill of the business. If a buyer is hung up on buying shiny stainless steel equipment instead of the cash flow from a profitable restaurant, there are warehouses full of it for sale at a tiny fraction of its cost new!