Catalog Articles Resources Find A Broker Franchises Kudos Guarantee Site Map About Us

This article is one of a series that offers insight and guidance into the process of buying selling or valuing a business. Whether you want to buy, sell, or appraise the fair-market value of a going-concern business, these articles provide specific guidance and references to help you accomplish your goal.

Understanding Goodwill

(excerpted from the book "Transaction Patterns" by Toby Tatum - with permission)

Business sellers and quite often business appraisers as well tend to focus their attention exclusively on the market value of the owner’s equity.  They want to know how much the owner can ‘take to the bank’ upon the sale of the company.  The effort devoted to the estimation and calculation of the seller’s equity notwithstanding, concern for this issue is virtually non-existent among business buyers.  Buyers couldn’t care less about the amount a seller will profit from the sale of his or her business.

The three things small business buyers typically want to know first about a potential acquisition are the seller’s discretionary cash flow, the total asking price for the business, and the amount by which that price exceeds the value of the business’s hard assets—i.e., the amount represented by the intangible assets.  Although the intangible assets of a going concern may be identified individually, for convenience of analysis and price negotiations among small business owners, they are usually all lumped together under the general heading of “goodwill.” 

Buyers want to know how much of the purchase price is represented by “goodwill” because they often have the very real alternative of starting a similar size business from scratch and therewith avoid paying for any ‘goodwill’ at all. This is something that many sellers don’t think about.  However, it would serve them well if they did. Sellers should always keep in mind that there is a price beyond which it will make more sense for a buyer to start a business rather than buy a business even considering the greater risk involved in doing so.  Indeed, the Small Business Administration estimates that approximately 880,000 new businesses were started in 1997. This is four times the number of going concerns that were purchased over the same time period. Moreover, assuming that both the prospective buyer and business owner can estimate the value of the company’s tangible assets included in the asking price, then even though the asking price is an all inclusive number, the only thing that is really being negotiated is the value of the company’s goodwill.  The value of everything else to be included in the price is more or less known going into price negotiations.

If you would like to learn more about Toby Tatums the book "Transaction Patterns" please click here.

About Toby Tatum

Toby Tatum is an active business broker and business appraiser and is a member of the International Business Brokers Association from which he has earned the designation Certified Business Intermediary and he is a member of the Institute of Business Appraisers from which he has earned the designation Certified Business Appraiser.

The author is also an experienced speaker and author on topics including the selling and buying of business, business management and strategic planning. He has published articles in newspapers and trade journals, and he is a former columnist for the Reno Gazette-Journal where he wrote column about buying, selling and valuing small business. In addition to Transaction Patterns, Mr. Tatum has also authored the book, Anatomy of a Business Purchase Offer

If you're considering buying, selling, or determining the value of a business, please take a look at some of the excellent books, reports, and software we have at Business Book Press to help you achieve success. For example:

The Business Reference and Pricing Guide is the bible of the business brokerage world. If you're a shrewd business buyer or seller, you will want this book to learn what just what the business broker knows. It will pay you big dividends throughout every aspect of the purchase and sale process. Learn more about it...

BizPricer™ Business Valuation Software is an accurate and inexpensive resource for prospective business buyers and sellers (and business brokers) who want to know the fair market value of a business. No financial expertise or specialized knowledge is needed. Save hundreds to thousands of dollars over hiring an appraiser to provide you with a similar result. Learn more about it...

Preparing A Business for Sale provides business owners with an understanding of the process they need to know to sell their business for the most money. Contains hundreds of little known tips, ideas and strategies to maximize the selling price of a business. Learn more about it...

Strategies for Successfully Buying or Selling a Business is our bestselling book. It has been recommended by Kiplingers Personal Finance Magazine, the BottomLine Personal Newsletter, and has been awarded the Best Business Book of the Year Award from the North American Bookdealers Exchange (NABE). Learn more about it...

Anatomy of a Business Purchase Offer provides you with all of the practical hands-on knowledge you need to make a successful purchase offer to buy a business. The author uses an actual Purchase Offer form to show you exactly what needs to be written and why! He details all of his recommendations in a line-by-line format for each and every aspect of the purchase offer. Learn more about it...

The Business Buyer's How-to Kit: We've assembled a specially-priced Kit with all of the key information you'll need to know to successfully buy a business.

The Business Seller's How-to Kit: We've assembled a specially-priced Kit with all of the key information you'll need to know to successfully sell a business.

Send this page to a friend! (click here)

BBP Resources

Business Valuation Software
BizPricer software to easily, quickly, accurately, privately and inexpensively value a business.

Business Valuation Rules of Thumb
Most complete source of business purchase and sale information available. Hundreds of valuation rules of thumb.

Buy/Sell Business Process
Strategies, tips, due diligence process and insider secrets for buying or selling a business.

How to Make a Purchase Offer
Detailed process including interactive form on CD for making a successful business purchase offer.

The Resource Guide for Business Brokers
Extensive information about the business brokerage field. Includes 45 different forms on CD.

Preparing a Business for Sale
This book provides 100's of strategies and tips to increase the selling price of a business.

Business Broker Professional Starter Kit
Get started in the lucrative field of business brokerage.

Business Buyer's Kit
Everything you need to successfully buy a business. Hard copy or download.

Business Seller's Kit
Everything you need to successfully sell a business. Hard copy or download.

Catalog | Articles | Resources | Find a Broker | Franchises | Kudos | Guarantee | Site Map | About Us | Home

© 1996-2011, All Rights Reserved
A Division of RDS Associates, Inc.
The best way of contacting us is by email (click here), It's fast, easy and free!
RDS Associates, Inc., Niantic, CT 06357