Goodwill and Other Intangibles

A few computers and a desk may well generate more value than an entire plant full of equipment.

What makes it possible for a company with very little value, in the way of hard assets, to command some of the high purchase prices that we have seen? The obvious answer is that they probably realize large amounts of profit and there is a demand for the product or service that they offer.

Although these are the rudiments of the “goodwill/intangible value” of a business sale transaction, there are other contributing elements. As a business owner, what measures can you take to build a business with a strong goodwill/intangible value?

Certainly, it is important to focus. If you can clearly identify the products or services you have to offer and the customers that will want them, you can carve out a market niche that will be more attractive to an acquiring party. Starbucks is a good example of focus.

A business “platform” encourages repeat business from your customers. The “platform” approach not only offers customers specific solutions to their immediate needs but also leads to additional solutions for the customer by offering a product architecture (like Microsoft) or a technology infrastructure (like AT&T) that keep the customer linked to the services you provide. This type of customer base is extremely attractive to an acquiring party. What are some add-on products or services that you can integrate into your business?

Branding, name recognition, level of service, vendor relationships are all elements that contribute to the goodwill/intangible value of a company.

Another component is transferability. If the business systems are well organized, an acquiring party will see how they will be able to transition into ownership smoothly, with minimal risk of losing business in the process. We’ve seen businesses with accounting systems that leave owners wondering where they stand with their customers and vendors, and inadequate information on their customers buying habits and needs. This erodes goodwill.

So if a small company with relatively few assets finds the right market space, systematically builds their customer base, creates a presence and tracks itself well, it will most certainly have a strong goodwill value.