Unlock the essence of Goodwill in business valuation - an intangible asset encompassing reputation, loyalty, and brand equity. Discover vital strategies to safeguard and amplify this asset, from customer service excellence to ethical practices, ensuring a lasting competitive edge and a prosperous future.
What is Business Goodwill?
Let’s quickly revisit what Goodwill is and why it’s important.
Goodwill in a business valuation refers to the intangible value that a company possesses beyond its tangible assets. It represents the reputation, customer loyalty, brand recognition, and other non-physical aspects that contribute to a company's success.
When a business is valued, Goodwill is considered to determine its overall worth. It reflects the company's ability to generate future profits, attract customers, and maintain a competitive edge. Goodwill is often calculated by assessing the difference between a company's market value and the fair value of its net assets. It is crucial for investors and buyers to understand the intangible value of goodwill when evaluating a business.
When selling a business, the Goodwill component can be quite a significant amount. It’s important therefore to adopt daily practises to ensure it’s protected. The value attached to Goodwill is seldom eroded by a single event, but instead protracted poor housekeeping across a number of areas.
So, what can be done to protect this valuable intangible asset?
1. Quality Control: Establishing robust quality control measures to ensure that your core business consistently meets or exceeds customer expectations. This builds trust and enhances the company's reputation. 2. Customer Service: Implementing excellent customer service practices, such as prompt response times, personalized support, and efficient issue resolution. This helps foster strong relationships with customers and reinforces their loyalty, supported by a sound and reliable CRM system with data that is refreshed regularly. 3. Brand Protection: Develop and protect the brand identity through consistent messaging using various channels consistent with brand guidelines. 4. Employee Retention: Provide comprehensive training programs for employees, building capability and empowering them to do more. 5. Ethical Practices: Adhering to high ethical standards in all business dealings thereby promoting integrity, trust and reliability. 6. Continuous Innovation: Stay ahead of market trends and constantly review your products and systems to maintain your competitive advantage. 7. Community Involvement: Engage in meaningful corporate social responsibility activities and contribute to your community. Support local initiatives, charities, or environmental causes, demonstrating a commitment to community outcomes. 8. Legal Protection: Safeguard intellectual property rights through patents, trademarks, and copyrights. Ensure compliance with relevant laws and regulations to avoid legal disputes that could damage reputation. 9. Proactive Communication: Maintain open and transparent communication with stakeholders, including customers, employees, suppliers, and investors. Regularly update them on company developments and address any concerns promptly. 10. Crisis Management: Develop a robust crisis management plan to effectively handle potential crises or negative events. Promptly address issues, take responsibility, and communicate transparently. Finally, separating business Goodwill from Owner’s Goodwill is extremely important. If too much of the business Goodwill is attributable to the owner’s presence and activities, you run the risk of a higher discount rate being applied in the business valuation as part of the due diligence process. In summation, robust management practices backed up by reliable systems and prompt problem resolution will maximise the value of your business Goodwill and leave as little money on the deal table as possible when you decide to move on.
Gregory Harrison is an accomplished Chartered Accountant, Author, Entrepreneur and Business Advisor