Goodwill: the difference between what someone is willing to pay for your company minus the value of your hard assets
The term “goodwill” is often thrown around in conversation as a subjective description of how much your customers like your business. However, when it comes to valuing your business, there is nothing subjective about it.
Let’s imagine the main physical assets in your plumbing company include five vans and some tools valued around $100,000. If you sold your plumbing company for $1,000,000, the acquirer would have paid $900,000 in goodwill ($1,000,000 – $100,000).
When a company sells for the value of its fixed assets, it is often one step away from closing down. As an owner, you must maximize the difference between what your business is worth to a buyer and the value of your fixed assets.
I remember the first time my husband and I tried to sell one of our companies – what a learning curve. Our struggle started when we were trying to do the deal on our own without having the right experience. He and I intently listed every single hard asset we owned, including the broken desk chair and camera. We were so focused on the tangibles that we didn’t strategize how to prove the value of the intangibles. We just assumed our best salesperson, who happened to be my husband, could simply “sell the blue sky”. Wrong. Instead, we ended up arguing with the buyer about the camera of all things.
More Than Bricks and Mortar
For an example of the difference between valuing a business for its hard assets versus its goodwill, take a look at the recent acquisition of Starwood Hotels & Resorts Worldwide by Marriott. Neither Starwood nor Marriott own many of the hotels that bear their name. Instead, they license the name to operators, franchisees and the brick and mortar owners.
So why would Marriott cough up $13 billion for Starwood if they don’t even own the hotels they run? Marriott discovered the Starwood Preferred Guest loyalty program has proven more popular than Marriott’s frequent traveler program.
Similarly, Uber is worth over $50 billion not because they own a ton of cars but because they service more than one million people per day.
Chasing Hard Assets at The Expense of Goodwill
Many owners focus on building their stockpile of hard assets, not understanding the concept of goodwill. To this day, I can’t look at a camera without connecting it to the memory of selling our precious business.
Accumulating tangible assets is fine but savvy owners looking to maximize value focus more on how intangible assets benefit customers. There is nothing wrong with owning hard assets unless they decrease the amount of capital you could be investing in creating goodwill. In those situations, the opportunity cost may exceed the value of owning the stuff.
Neither Uber nor Starwood would be the companies they are today had they pursued a strategy of accumulating hard assets. Uber never would have made it out of San Francisco if they bought a new car every time they added a driver to their network.
Focus on what creates value for customers to maximize the value of your business far beyond that of your hard assets.
Author Terri Wilcox is co-founder of Resultants For Business and an experienced Business Advisor, organizational strategist and certified Senior Professional in Human Resources (SPHR). Connect with her and other RFB® Business Advisors here, or on LinkedIn.