In his book book “Transaction Patterns”,  business author Toby Tatum explains the key role that a business’s goodwill plays in the sale and purchase of a small 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… and the amount by which that price exceeds the value of the business’s hard assets… [ie] the intangible assets, [which] for convenience of analysis and price negotiations … are usually all lumped together under the general heading of ‘goodwill’. 

Assuming both buyer and vendor can estimate the value of the company’s tangible assets included in the asking price… the only thing that is really being negotiated is the value of the company’s goodwill.”

Read more about Tatum’s book online here.

Being able to quantify the value of the goodwill your business holds is essential if you are selling, and as a buyer you need to be able to get a strong feel for how much the goodwill of a business is worth in real terms.

You are welcome to contact our consultants for advice and guidance when purchasing or selling a small business in New Zealand.