Determining the goodwill value of a business is never a clear issue. Goodwill refers to the intangible value the business has created above the value of its tangible assets such as manufacturing plants, cash on hand or equipment. Large companies such as Microsoft and Coke have created a strong brand awareness that is impossible to quantify. You can narrow this perceptual value by analysing how much the company is asking for, and subtracting the value of the tangible assets of the company. Nevertheless, values are subjective and price always comes down to how much someone is willing to pay.
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Get the profit and loss statements of the company for the last three years. Make an adjustment for payments to the owner or manager that are over and above the reasonable salary for the work they are doing. Take the additional income, if there is any, and subtract it from the rest of the income.
Compare the income of the company with the industry average. If the income is above industry average, then the company has a higher earning potential and thus a greater goodwill value.
Analyse the company's reputation. The reputation or public perception of a company can greatly increase or decrease the goodwill of a company. Start by doing an online search for the company and note any complaints or praise from customers. Determine if the company has a very loyal client base and ask what percentage of sales comes from repeat clients. The goodwill is almost always related to future profitmaking potential. However, there are cases where a company may be worth more to a specific buyer, and that buyer is willing to pay above and beyond market value.
Determine if the company has a strong visual presence in the industry. Are there a lot of billboards around town with the company's name on it? Does the company have a professional and eye-catching logo and image? Do customers recognise its logo as being related to its specific service? Is the company's brand recognition limited to a specific city or neighbourhood, or does it have mass appeal? You should answer all these questions based on your own observations or surveys within the company and current and past clients.
Find out if the business has ownership over any patents or other copyrighted assets. The goodwill value of a business may lie in its ownership of important patents that have future earning potential. Determine the value of these patents by analysing future trends and comparing the potential usefulness of the patented idea to the price asked.
Tips and warnings
- Remember that the value of a business is subjective and its worth is always determined by how much a buyer is willing to pay for the business. It is not uncommon for buyers to pay too much for a new business, as was the case with the dotcom boom of the late 1990s, with investors pouring money into new businesses with earning potential that no one could determine.
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