Thinking about buying or selling a business? Then you’ve come across the term ‘goodwill’ once or twice. But have you ever thought about how goodwill impacts a business sale? The truth is, goodwill can affect both the listing price and final sale price of a business. But the big question here, is why?
Before we explain the impact goodwill has on business sales, it’s important to understand exactly what it is!
According to the Oxford Dictionary, Goodwill is:
“The established reputation of a business regarded as a quantifiable asset and calculated as part of its value when it is sold.”
Want to learn more about what goodwill means? Lucky for you, we covered this in a 2019 blog ‘What is ‘Goodwill’?’ – click here to take a look
Now that we understand goodwill, let’s dive in!
How goodwill impacts a business sale
In short, goodwill is an intangible asset. It’s the way your business is perceived by the public due to profitability, success, reputation and more. For this reason alone, valuing goodwill can be somewhat subjective. However, every business owner knows how much time, effort and energy go into creating and improving a business’ goodwill. Therefore, goodwill accounts for a large portion of the overall listed sale price.
A business with little to no reputation (or even a poor one!) will have a lower value attributed to its goodwill. Whereas a business that has actively engaged with the community and is a household name and of course showing excellent profits, will have a much higher dollar value connected to its goodwill when it comes time to sell.
Complicating matters, the ATO now allows “instant asset write-offs of newly acquired fixed assets” for eligible businesses. This means that the book value of the fixed assets of the selling company will have a very low value, theoretically increasing the value of the goodwill. This may be a disadvantage to a Buyer having to allocate most of the purchase price to goodwill. However a contract of sale can be drawn up with no allocation of the purchase price between assets and goodwill, thus allowing each party to make their own allocations between asset values and goodwill. Buyers should obtain advice from their accountant and solicitor, which is something we highly encourage here at Core Business Brokers.
If you’ve got questions about goodwill, or the business sale process. Contact the team at Core Business Brokers today. All of our current business listings have been appraised by our knowledgeable team, so when it comes to goodwill – we are ready to answer any questions on the tip of your tongue. Chat to Roy, Rad and the team today by giving us a call on (02) 9413 2977, or email Roy directly at [email protected] or Rad, at [email protected].