What exactly does the term “goodwill” mean when it comes to buying or selling a business? Usually, the term “goodwill” is a reference to all the effort that a seller puts into a business over the years that he or she operates that business. In a sense, goodwill is the difference between an array of intangible, but important, assets and the total purchase price of the business. It is important not to underestimate the value of goodwill as it relates to both the long-term and short-term success of any given business.
According to the M&A Dictionary, an intangible asset can be thought of as asset that is carried on the balance sheet, and it may include a company’s reputation or a recognized name in the market. If a company is purchased for more than its book value, then the odds are excellent that goodwill has played a role.
Goodwill most definitely contrasts and should not be confused with “going concern value.” Going concern value is usually defined as the fact that a business will continue to operate in a fashion that is consistent with its original intended purpose instead of failing and closing down.
Examples of goodwill can be quite varied. Listed below are some of the more common and interesting examples:
- A strong reputation
- Name recognition
- A good location
- Proprietary designs
- Trade secrets
- Specialized know-how
- Existing contracts
- Skilled employees
- Customized advertising materials
- Technologically advanced equipment
- Custom-built factory
- Specialized tooling
- A loyal customer base
- Mailing list
- Supplier list
- Royalty agreements
In short, goodwill in the business realm isn’t exactly easy to define. The simple fact, is that goodwill can, and usually does, encompass a wide and diverse array of factors. There are, however, many other important elements to consider when evaluating and considering goodwill. For example, standards require that companies which have intangible assets, including goodwill, be valued by an outside expert on an annual basis. Essentially, a business owner simply can’t claim anything under the sun as an intangible asset.
Whether you are buying or selling a business, you should leverage the know how of seasoned experts. An experienced business broker will be able to help guide you through the buying and selling process. Understanding what is a real and valuable intangible asset or example of goodwill can be a key factor in the buying and selling process. A business broker can act as your guide in both understanding and presenting goodwill variables.
A recent article from Divestopedia entitled “7 Fundamentals to Due Diligence You Need to Know” explains the due diligence process and what it means regarding sellers and buyers and their roles in the process.
Whether a company is being sold or it is merging with another company, it is standard practice to go through the due diligence process. Therefore, they should be aware of all the factors involved with the due diligence process. The fundamentals of due diligence can be broken into 7 categories:
- Historic and Projected Financial Information
- Technology Developments and Intellectual Property
- Customers and Revenue Streams
- Contract Agreements and Insurance
- Key Staff and Management
- Legal and Compliance
- Tax Issues
In each of these 7 critical areas, the buyer and the seller each have to do their part in order to see the deal make it to the finish line. The seller has to be open and honest with the attorneys, their advisory team and the potential buyer; and the buyer has to be thorough in examining and combing through all of the information provided.
A recent article from NuWire Investor entitled “How to Find the Right Broker to Sell your Business” explains the most important characteristics a seller should be looking for in a business broker when deciding who to hire.
When it comes to hiring a business broker to sell your business, you want to ask the following questions to ensure that you’re choosing a broker who will improve your experience and increase the chances of selling your business:
- What do they know about major players, important trends, insider terminology or future industry projections? It’s important that a business broker is well acquainted with and well connected in your specific industry.
- What have they sold before, and what is their success ratio? Beware of a business broker who isn’t transparent with you on these things.
- How do they charge for their services and when are they expecting to be paid? A good business broker will set these expectations up front, very clearly in the agreement between the seller and broker. Typical commissions are between 8 and 12%, paid after the business is sold.
- How is the business broker planning to market your business? As a buyer, you want to make sure that the broker you choose to work with has plans to engage their network and actively seek out connections who would be interested in your business.
When it comes to choosing a business broker to work with, who you choose to handle the sale of your business matters tremendously. It is better to take your time and find someone who makes you feel comfortable and has the proper knowledge and connections than it is to miss out on a favorable deal.
A recent article from Inc.com entitled “Selling a Business in 2019: Three Important Things to Keep in Mind” discusses the factors that sellers should consider when developing their exit plan, according to small business experts.
While sales prices are rising and 60 percent of owners are confident that they would receive a favorable sales price if they sold their business today, it’s understandable that some owners would be tempted to jump into a sale. With the baby boomer generation fueling the market at a rate that is faster than ever, and GDP expecting to slow its pace as we approach 2020, entering the market now becomes even more enticing. However, experts warn sellers not to prematurely jump into a deal and to have a clear and well-thought-out exit strategy to guarantee an optimal sales price and a smooth sale.
Two critical parts of a well-thought-out exit strategy are investing in your business and preparing your financials. Once you’ve made the decision to sell your business, experts suggest determining any key items that will either motivate or deter a buyer from choosing your business over the other businesses on the market. Use these key items to invest in your business and make it more appealing on the market. 2019 is expected to bring multiple increases in the overhead expenses associated with running a business. When preparing your business for sale, make sure you address these concerns and clean up your financials. Be prepared to have a good explanation for any revenue declines.
A recent article from Entrepreneur.com entitled “3 Reasons Buying a Franchise Might Be Better Than Starting Your Own Business” explains how purchasing a franchise provides exceptional support and guidance when it comes to getting your business up and running. There are 3 key advantages to purchasing a franchise:
- Carrying the name of an already established business makes it easier to gain new business from startup.
- Cost Benefits: When purchasing a franchise you have to pay a franchise fee, which may increase your initial costs, but it gives you access to many resources that can help your business turn a profit faster than if you were to start up a business from scratch.
- The ability to sell at a higher price when it comes time to exit: A well-known brand and business operations consistency combined with a detailed transition manual provided by the franchisor allows for a smoother transition and a higher chance of profitability for the buyer.
A recent article from Divestopedia entitled “How Do I Attract a High Multiple for My Business? – The Sales Process” explains how the sales process impacts a company valuation.
While you cannot transform an average business into a high multiple business, there are a few guidelines you can follow to encourage a higher enterprise value at the closing date. The first of these guidelines is that the ideal time to sell is when there are positive trends in revenue and earnings. A positive trend means that there has been consistent growth over the past two years (keyword: consistent) and that there are future prospects on the horizon.
The second important factor in the sales process is who you’re selling to. It’s crucial to not only thoroughly screen your buyers, but to keep as many options open as long as possible. When there are multiple buyers interested, you have leverage as the seller.
The third and final piece affecting the end value of your business in the sales process is why you’re selling it. Who you choose to sell the business to and how long you remain after the sale is highly dependent upon this answer.
Business appraisals are not one-dimensional. In fact, a good business appraisal is one that factors in a wide range of variables in order to achieve an accurate result. Indisputable records ranging from comparables and projections to EBITDA multiples, discount rates and a good deal more are all factored in.
It is important to remember that while an appraiser may feel that he or she has all the information necessary, it is still possible they have overlooked key information. Business appraisers must understand the purpose of their appraisal before beginning the process. All too often appraisers are unaware of important additional factors and considerations that could enhance or even devalue a business’s worth.
There Can Be Unwritten Value
Value isn’t always “black and white.” Instead, many factors can determine value. Prospective buyers may be looking at variables, such as profitability, depth of management and market share, but there can be more that determines value.
Here are some of the factors to consider when determining value: How much market competition is there? Does the business have potential beyond its current niche? Are there a variety of vendors? Does the company have easy access to its target audience? At the end of the day, what is the company’s competitive advantage? Is pricing in line with the demographic served? These are just some of the key questions that you’ll want to consider when evaluating a company.
There are Ways to Increase Both Valuation and Success
No doubt, successful businesses didn’t get that way by accident. A successful business is one that is customer focused and has company-wide values. Brian Tracy’s excellent book, “The 100 Absolutely Unbreakable Laws of Business,” notes that it is critical for businesses to have a company-wide focus on three key pillars: marketing, sales and, of course, revenue generation. Tracy also points out that trends can be seen as the single most vital factor and bottom-line contributor to any company’s success and, ultimately, valuation. For 2018 and beyond, projected trends include an increase in video marketing, the use of crowdfunding as a means of product validation and more.
No Replacement for Understanding Trends
If a company doesn’t understand trends, then it can’t understand both the market as it stands and as it may be tomorrow. Savvy business owners understand today’s trends and strive to capitalize on the mistakes of their competitors while simultaneously learning from their competitors’ successes.
Tracy accurately states that while there are many variables in determining value, finding and retaining the best people is absolutely essential. One of the greatest assets that any company has is, in the end, its people.
Leases should never be overlooked when it comes to buying or selling a business. After all, where your business is located and how long you can stay at that location plays a key role in the overall health of your business. It is easy to get lost with “larger” issues when buying or selling a business. But in terms of stability, few factors rank as high as that of a lease. Let’s explore some of the key facts you’ll want to keep in mind where leases are concerned.
The Different Kinds of Leases
In general, there are three different kinds of leases: sub-lease, new lease and the assignment of the lease. These leases clearly differ from one another, and each will impact a business in different ways.
A sub-lease is a lease within a lease. If you have a sub-lease then another party holds the original lease. It is very important to remember that in this situation the seller is the landlord. In general, sub-leasing will require that permission is granted by the original landlord. With a new lease, a lease has expired and the buyer must obtain a new lease from the landlord. Buyers will want to be certain that they have a lease in place before buying a new business otherwise they may have to relocate the business if the landlord refuses to offer a new lease.
The third lease option is the assignment of lease. Assignment of lease is the most common type of lease when it comes to selling a business. Under the assignment of lease, the buyer is granted the use of the location where the business is currently operating. In short, the seller assigns to the buyer the rights of the lease. It is important to note that the seller does not act as the landlord in this situation.
Understand All Lease Issues to Avoid Surprises
Early on in the buying process, buyers should work to understand all aspects of a business’s lease. No one wants an unwelcomed surprise when buying a business, for example, discovering that a business must be relocated due to lease issues.
Summed up, don’t ignore the critical importance of a business’s leasing situation. Whether you are buying or selling a business, it is in your best interest to clearly understand your lease situation. Buyers want stable leases with clearly defined rules and so do sellers, as sellers can use a stable leasing agreement as a strong sales tool.
Buying a business can be an exciting prospect. For many prospective business owners, owning a business is the fulfillment of a decades long dream. With all of that excitement comes considerable emotion. For this reason, it is essential to step back and carefully evaluate several key factors to help you decide whether or not you are making the best financial and life decision for you. In this article, we’ll examine five key factors you should consider before buying a business.
What is Being Sold?
If you hate the idea of owning a clothing store, then why buy one? The bottom line is that you have to have a degree of enthusiasm about what you are buying otherwise you’ll experience burnout and lose interest in the business.
How Good is the Business Plan?
Before getting too excited about owning a business, you’ll want to take a look at the business plan. You’ll want to know the current business owner’s goals and how they plan on going about achieving those goals. If they’ve not been able to formulate a coherent business plan then that could be a red flag.
You need to see how a business can be grown in the future, and that means you need a business plan. Additionally, a business plan will outline how products and services are marketed and how the business compares to other companies.
How is Overall Performance?
A key question to have answered before signing on the bottom line is “How well is a business performing overall?” Wrapped up in this question are factors such as how many hours the owner has to work, whether or not a manager is used to oversee operations, how many employees are paid overtime, whether or not employees are living up to their potential and other factors. Answering these questions will give you a better idea of what to expect if you buy the business.
What Do the Financials Look Like?
Clearly, it is essential to understand the financials of the business. You’ll want to see everything from profit and loss statements and balance sheets to income tax returns and more. In short, don’t leave any rock unturned. Importantly, if you are not provided accurate financial information don’t hesitate, run the other way!
What are the Demographics?
Understanding your prospective customers is essential to understanding your business. If the current owner doesn’t understand the business, that is a key problem. It should be clear who the customers are, why they keep coming back and how you can potentially add and retain current customers in the future. After all, at the end of the day, the customer is what your business is all about.
Don’t rush into buying a business. Instead, carefully evaluate every aspect of the business and how owning the business will impact both your life and your long-term financial prospects.
This remarkable business is making it’s way to Charleston to continue the amazing tradition that has received national attention since it’s inception. Bitty and Beau’s is more than just a coffee shop, it’s an institution that is built around providing a meaningful work environment that integrates people with intellectual and developmental disabilities (IDD) into their community.
Founded in 2016, the organization now employees over 40 people with IDD and is planning to expand their operation to Charleston! We could not be more excited for their success and are delighted that they picked Charleston as their new home.
Radekopf & Associates is proud to maintain our committement to charitable causes like Bitty & Beau’s and are working to secure a new commercial space for this truly special and worthy organization. As you know, the Charleston real estate market (even the commercial side) is extremely strong at the moment, and that means that inventory is low.
Bitty & Beau’s have been actively looking and Radekopf is on the search to help them find the perfect location. We are thinking this may be in a sleeper location possibly in the upper Meeting Street or rapidly growing neck extension of downtown- but we want to hear from you! Where could you see this unique business planting roots in Charleston? If you have any ideas or know of a suitable commercial space that could make this dream a reality, please call Steve Radekopf at (843) 579-2217
Check out the Bitty & Beau’s official video here:Read More