How much is Goodwill worth?

fruityslh

My friend has been offered a 50% share in a small business that has been trading for 20 years. He works for the business at the moment together with an other who has been offered the other 50% share.

They have a good relationship and have no qualms about going into business with one another. The query is that the owner wants to sell the business (this does not include premises, they would be let separately) for stock, vehicles and goodwill he wants £80K. The stock is worth Max £20K and the vehicles Max £5K (These figures are being very charitable). They would also need to invest a further £10K in new equipment.

Is the goodwill worth £55K?? Most of the trade is repeat trade, which both guys know really well., and they effectively run the business, if they decided to go it alone and invest in new stock and premises it would cost them £30K, but they’d have to move premises and start with a new name, conversely if they did start up else where the owner of the current business would have to close as he has no experience of the day to day business, hence the quandary!!!!!!. Is £80K too much????. Takings are between £3-10K a month

greyteam1959

According to our accountant goodwill is worked out like this.....
Weighted average of pre tax profits over 3 years
eg
year 1 profits = £7771 x 1 = £7771
year 2 profits = £10423 x 2 = £20846
year 3 profits = £18095 x 3 = £54285
Total = £82902
Average = £82902 divided by 6 = £13817
Goodwill at say 1.5 times weighted average =£20725
Complicated or what
Never mind what the takings are what is the gross profit ??
I would say that on takings of £3000 to £10000 goodwill at £55000 is taking the p**s

mikewebs

bottom line if what is the annual net profit. If it is £10000 then I think the £55k is a bit ambitious, but if the net profit is a lot better, say £25k or more then I would still be a bit cautious - bear in mind you have to think out of your 50% profit share(i.e. £12500), you have to take your drawings, salary etc (and so does the other partner) not much return for your money is it
?

Please think carefully about this one.

WHA

Get his accounts and take them to an accountant to go over the figures.

You need his accounts to see the profit margins he is making and what your "expenses profile" would be if you bought it. I.e. what expenses will be the same, what will disapper (i.e. anything personal to him) and what expenses will appear (i.e. rent to him for the property?).

There is NO formula for measuring goodwill. It is always dependant upon negotiation between the buyer and the seller. The buyers accountant will use every trick to reduce the value, the sellers accountant will use every trick to increase the value. Somewhere, you'll arrive at a figure you can both live with, or you walk away.

You also need to factor in your own personal positions. What happened if he sold it to someone else who was going to run it themselves and didn't need you as staff? Your future employment may depend on buying it yourself rather than risking redundancy.

Don't underestimate the costs of setting up a competing business, the ease of finding premises and kitting it out, etc., and don't over-estimate the number of customers and value of sales you hope to take away. Starting up on your own is a risk. You may think that the business relies on you and the owner couldn't run it without you, but that is rarely the case.

Finally, make sure that you are legally allowed to start a business in competition and take his customers. Your ability to do so may be limited by the terms of your contract of employment.

I would work from the basis of there being no goodwill value - there rarely is any "real" goodwill in very small businesses. If, however, the current owner really does very little, yet manages to earn a decent profit from it, then there is a goodwill value, to be negotiated.

Whether you buy it or start a new business, make sure you do proper cash flow and profit projections. Factor in all expenses. As a general rule of thumb, I'd add a contingency of between 50%-100% of your projected costs to cover all the "unforeseens".

Good luck!