What is goodwill?
Many business owners struggle with understanding the true value of their business and think that it is just the value of tangible assets you can see or touch. In reality, the value of your business may be significantly more, thanks to goodwill.
As the term suggests, it is the complementary or positive feelings that people have about your business. It's reputational; it's intangible, but goodwill is what gets customers through the door, and, just as importantly, keeps them coming back.
What goes into goodwill?
All of these things - and more - can add value to your business because they potentially create future profits.
- Great service that boosts reputation
- Unique or niche products
- Convenience of your location
- Loyal customer base who advocate
- Relationship to local community and suppliers
- Better known than competitors.
It is these future profits that mean a potential purchaser might be willing to pay a premium for your business, over and above the value of its tangible assets.
How does goodwill work?
"Bunnies" is a small but fictional local bakery that operates from its own premises with a value of $200,000. It also owns equipment and other fixtures worth $40,000.
Its stock is valued at $5,000. Therefore the total value of the tangible assets is $245,000.
However, Bunnies has been operating for many years and is well known to local residents who sing the praises of Ben's buns. So when Ben put the bakery on the market, the selling price wasn't $245,000 but $375,000.
Q. So why would someone be prepared to pay more for a business than the value of its assets?
A. Because people are prepared to pay a premium for potential future profits.
What maximises goodwill?
A key element of goodwill that is often overlooked is that of consistency. Ask yourself; what is it that your customers expect, all the time? In Bunnies' context, the expectations might be consistently delicious and fresh breads and cakes.
The secret to consistency is your systems and procedures, and having them written down. Comprehensive systems and manuals help to ensure that all staff know how to do their job and what is expected of them.
These manuals can also be used when training new staff so that they know what to do to provide a consistently high level of performance. If your customers receive the same consistently great experience every time they visit, they're far more likely to recommend you to family and friends.
This is just one element though that can help maximise goodwill. To maximise goodwill in your business think about what gets a customer in the door, and what is it about your business that keeps them coming back to buy from you. Understanding what makes your business successful is only half the battle. Your task is to maximise those goodwill factors so that when the time comes to sell, you can multiply the return.
Things you should know
* Bunnies is a fictitious business used as an illustration only.
General advice: This information is general only and does not constitute any recommendation or advice. It is current at the time of publication, and is subject to change. It has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on the information, consider its appropriateness, having regard to these matters. Consider obtaining personalised advice from a professional financial adviser and your accountant before making any financial decisions in relation to the matters discussed in this document, including when considering the finance options for your business.