09 May Understanding and Leveraging the Power of Goodwill in a Business Acquisition
Many businesses underestimate the power of customer relationships today. In a world that is dominated and powered by technology and automation, it seems that human interactions – whether by phone, email or chat – are few and far between. Although it is true that technology has helped many businesses save time, money, and resources by streamlining processes, workflows, and organizing data, it cannot “automate” customer relationships. This especial
Customers today want to work with entities and organizations they can trust. They are looking for that unique, personalized experience, and want to be heard. In fact, some businesses that don’t recognize the value of customer or buyer experiences often see their business’ brand, name or reputation suffer as a result.
Ensuring that your business exercises goodwill practices will not only keep you customers happy and satisfied and want to continue working with you, but you will also appeal to your stakeholders, which can prove to be useful in merger and acquisitions situations.
Here we will discuss the concept of goodwill, and how personal and enterprise goodwill can provide more value to a business, especially as you look to engage an investment banking firm to assist in the sale.
What is goodwill?
To start, let’s first explore what we mean by goodwill in the context of B2B or B2C customer relationships. There are two fundamental types of goodwill: 1) enterprise and 2) personal.
Enterprise goodwill relates to the number of years the company or organization has been in business, the expertise and experience of the staff, the number of locations and its reputation as a whole.
On the other hand, personal goodwill relates to individuals on a more personal basis, such as the specific individual’s experience in a particular industry, professional qualifications or licensure, unique skills and talent, and personal relationships with customers. Although the word “personal” doesn’t always seem appropriate in an enterprise, personal goodwill is often recognized and does exist in professional environments.
For example, personal goodwill can play an important role in mergers and acquisitions. Identifying and quantifying personal goodwill can result in a favorable tax situation for the seller. Demonstrating goodwill assets can be taxed at capital gains rate rather than traditional income rates.
goodwill valuation Methods
Here are some methods on applying personal goodwill to your business, and how each method can provide benefits and value to your business.
With vs. Without Method— This approach determines the overall value of a company— with and without an individual who demonstrates personal goodwill. This approach also seeks to provide insight as to how much income would be lost without the efforts of the key individual and his or her personal goodwill.
Bottom–Up Method — This method focuses more on financial concepts that are used to determine the overall value of a company. The appraiser allocates the value of the enterprise to the tangible assets of the business, and any remaining value is attributed to personal goodwill.
Top–Down Method — This method evaluates the value of the business enterprise as a whole, then seeks to divide the total goodwill between personal and enterprise goodwill.
All in all, if structured properly, a business can receive significant benefits and little tax implications from selling a business from instilling goodwill practices in a business.
In order to determine which goodwill method is applicable or the best approach for your business valuation, an owner or entrepreneur must consider various factors and the possible outcomes of each. It is best to discuss each scenario and possible implications and outcomes with a qualified tax professional.