Goodwill - how does one put a value on it?

[Frizzle]

Just would like some feedback on the concept of "goodwill' from a buyer's point of view, please. Currently a business for sale has been let "go to the dogs" .. however, the owners are trying to justify their asking price because they feel there is an element of "goodwill". Personally I would be thinking that as the business is not running all that well, the goodwill component doesn't stand for much. But in the wider scheme of things, how is goodwill valued?
Frizzle

 

[Propertunity]

There is a way accountants work it out.
http://en.wikipedia.org/wiki/Goodwill_(accounting)

 

[brendio]

Maybe you could use this quote from the above article to counter the vendor's claim.

Goodwill can be negative, arising where the net assets at the date of acquisition, fairly valued, exceed the cost of acquisition.[1] Negative goodwill is recognized as a liability.

I think you have to work backwards to work out the value of goodwill. First, you work out what multiple (say 3 or 4 times) of the maintainable earnings you are willing to pay for the business. The value of goodwill is then the difference between this value and the value of the (net tangible) assets of the business.

 

[Sunfish]

Good will is real but the actual amount is subjective.

As a purchaser you can never depreciate GW, it will sit on your accounts until you sell so it is in your interests to boost the "plant and equipment" value and limit the GW. For the seller, any dollar value received for plant and equipment over the written down value has tax implications, so it is in his interests to keep the GW high. (General tax advice only, see your accountant)

But if you are buying his business it must be because it is more practical to do so than to simply open up in opposition, ergo there is some goodwill there. In my industry, for example, most new entrants simply go into opposition because there is no shopfront needed. But they are stoopid! There can be good value in buying an existing business which isn't obvious to the wood ducks.

Respect the vender and try to come to a mutually advantageous price.

 

[Frizzle]

Thanks for your responses. Appreciate the info and the references.
Frizzle

 

[Xenia]

You can only do your due diligence based on the profitability of the business. Look at the facts and put an offer in based on what works for you. The other person's view point on how they justify the value of their business should not come into your calculations.

Businesses and properties are always overinflated as sellers try to get as much as they could and you can't blame them for trying.

 

[Sunfish]

Businesses and properties are always overinflated as sellers try to get as much as they could and you can't blame them for trying.

And buyers want something for nothing. Consider that the owner has probably tried a number of things which haven't worked and have been discarded. You pay nothing for this experience.

One day Xenia you will be a seller and you will think of all the costly "trials" you have done. If your buyer is reasonable you will pass on that info for nothing.

 

[Xenia]

Yes true, just realized how one sided that sounded. As a seller I would definitely want to be paid for my experience and would take the highest and best offer presented.

 

[chilliblue]

As a commercial agent, I have never seen the evidence of paying for goodwill.

Quite often, goodwill is the networking of the people working in the business and that quickly disappear when they do.

Have a talk to the locals who frequent the business and have a talk to them but never feel pressured to pay for goodwill.

 

[willair]

Just would like some feedback on the concept of "goodwill' from a buyer's point of view, please. Currently a business for sale has been let "go to the dogs" .. however, the owners are trying to justify their asking price because they feel there is an element of "goodwill". Personally I would be thinking that as the business is not running all that well, the goodwill component doesn't stand for much. But in the wider scheme of things, how is goodwill valued?
Frizzle

I have down this road a few times in my life,and paided the price,Goodwill can mean many things-- 2 set of books one for the "ATO"one for 2 hour fire 100K insured safe proff safe--if anyone ever tell you they work on 2 sets of books then just say thanyyou and walk straight out the door,because you will be forced to build a Business that works from the gutter up,and it does not take a genius to see straight through the most sales people after all "VALUE IS WHAT YOU PERCEIVE IT TO BE,, AND NOTHING MORE",

Goodwill is valued on one item cashflow,and always keep this in the back of your mind,as you will come face to face,with the unavoidable truth,in the end you don't own a Business you own a "JOB",unless you understand what hardship means,,good luck willair..