Most business owners will fall into a trap if they don’t know the difference before planning the sale of their businesses.
Business buyers think “blue sky” is the same thing as “Good Will” and, if the business owner doesn’t correct them with the right information and definition then the business owner probably won’t get paid for the hard work poured into the business.
Blue sky is just that….look up and what can you see? Only blue sky! It can’t be measured and a savvy buyer won’t pay for it.
Good Will is a measurable asset of a business, if the business has any. If you have it you can get paid for it as part of the purchase price a buyer will pay for the business.
Measuring Good Will is part of any certified, independent, third party business appraisal, which is why every business owner should have one so Good Will becomes an asset that has a value assigned to it by a professional business appraiser.
In basic terms Good Will is tied to the net cash flow or EBITDA (earnings before interest, taxes, depreciation, amortization). This is also described as “cash flow” but good business brokers and appraisers know that cash flow is more than EBITDA. There are almost always other expenses that can be “added back” to EBITDA to reveal (not create) the SDCF (seller discretionary cash flow), which is sometimes called TON (true owner’s net).
In essence, it is the amount of money the current owner of the business can prove is going into “Hip National Bank.”
Please note the word “PROVE.”
There must be a paper trail that a buyer can follow to see all the income and expenses of the business or the seller won’t get paid for it.
A professional business broker is trained to help a business owner do a recast of income to find the SDCF and TON which is the key number to placing a value on the Good Will of the business.
Once the SDCF is revealed then a formula is applied by the business appraiser based on the financial history and trend of the business.
It is complicated and business owners should only depend on professional business appraisers to establish the value of Good Will.
Once that value is established and certified to by a business appraiser then the business owner has the opportunity to be paid for it.
If you are a business owner and want to know if your business has any Good Will and if you can get paid for it, then contact CBI+Team today for a free, no-obligation consultation.