What’s goodwill worth?

“How much is my business worth?” is a typical question asked by business owners trying to affix a price on what they intuitively believe to be a company’s true value.

Determining fair market value of net tangible assets (working capital, equipment, land and buildings) is fairly straightforward. But the value of goodwill can be elusive, and isn’t recorded in the financial statements.

To be commercially valuable, goodwill has to be transferable to a new owner. Personal goodwill (which attaches to a person as a result of their personal qualities, reputation or relationships) is only valuable to one person and can’t be sold to a third party. It has no worth on the open market.

Successful business are often surprised when bids that take the un-transferability of goodwill into account come in low. But if they failed to build goodwill among clients for other members of the staff, they have nobody to blame but themselves.

This table presents a categorization of intangible assets often held by company owners:

In addition to these, goodwill refers to more general and typically non-identifiable or non-separable assets such as:

• Business structure in place, including trained and assembled workforce, systems, manuals, and processes
• Business reputation, market share or dominance
• Ability to sell new products to new customers
• Esteem for the founder, which may not continue after a sale

As you prepare your business for sale, convert personal goodwill into commercial goodwill. Share customer relationships and business know-how with other employees so the business can run independently, This makes it more attractive to buyers.

And, strengthen contracts with customers, suppliers, distributors and key employees. These things give the buyer confidence the business will hum along after you leave.