NORTHERN TAX & FINANCIAL SERVICES
No one wants goodwill that turns bad on their balance sheet.
I have just had a conversation with my husband, asking him what he believes ‘Goodwill’ is. Coming straight from the cane paddock, he was like ‘Well if I had a harvester, and wanted to sell it, it would only be worth its book value, but if that harvester was attached to a 130,000-tonne contract, then that harvester would be worth a hell of a lot more wouldn’t it? That to me is goodwill.’
True, it would. So how do you protect that goodwill?
I asked my husband, how often, when these harvesting contracts sell, does the original owner go back out to market, with a brand-new harvester, approach those old farmers, and take back the work?
He didn’t want to reply to that.
My point is, anyone can pay a lot of money for a business, any kind of business, and once you deduct the assets of that business, at the correct valuation, the remainder is goodwill.
How much you pay for that goodwill depends on your market research and what you would consider reasonable.
But what if that goodwill depended on relationships? And relationships that the existing owner has with the existing clients/customers/farmers? Are there lots of little clients with simple, replicable arrangements, or is there just a few major customers/clients that maintain and possibly depend on a long-standing, significant relationship with the current owner?
What you have to ask yourself is ’Can I replace the relationships that the current owner has? Can I be the person to take over that relationship and conduct business in the same way and, most importantly, can I sustain that relationship?
The downside to goodwill (or badwill as my husband would call it), is that those customers, knowing no better, follow the existing owner into their new business, that they set up down the road, at a later point in time.
You have to be certain of a few things here. One, that you have a water-tight arrangement/contract on purchase of that business that mitigates this potential loss of business/clients/relationships. Two, you do your absolute best to replace that relationship with your own and offer better service/product. Three, that you do your due diligence before paying for the goodwill, that the value is reasonable, that the relationships are quantified, and that the risk of the clients/customers leaving is at an acceptable level.
There is a lot of trust surrounding the word goodwill. Where there is money involved, there is also greed, and if you are spending your own hard-earned money on a business where you perceive some level of risk in your customers leaving, then you need to plan for this and work out how you will prevent these losses going forward. It may affect your bottom line, whether it is immediately, or down the track.
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