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By Brett Goodyer, FCPA B.Com M.ForAccy – Forensic Accountant, Business Valuer, Bullshit Slayer Before you open Excel, open your ears. You can’t value a business if you don’t understand the owner, the risks, and the realities behind the numbers. This one’s for the advisers who want to go deeper. If your idea of valuing a business starts with opening Excel and plugging in numbers, you’re already in trouble. Because no matter how clean the P&L looks, if you don’t understand who’s running the show, how they’re making money, and what sort of chaos is bubbling under the surface… you’re valuing the wrong thing. Let’s talk about Leo… Leo owns a dog grooming salon. He also owns the building it’s in, the café next door, and a rather unhelpful parrot that has apparently learned to say, “You missed a spot!” every time someone sweeps the floor. Leo’s business technically turns a modest profit. Bute here’s the problem, Leo has got three cousins on the payroll, none of whom actually work there, and he’s been running all his groceries through the business account (because the dogs like snacks too).   If you are trying to value Leo’s business based solely on his financials, you’d think it’s either a struggling side hustle or a money-laundering front for a shady pet mafia. But if you sit down with him, hear his story, understand the property arrangement, spot the real cash flow (not the creative one), and notice that he’s booked out three months in advance with a waitlist of pampered poodles, you’ll see it for what it is. A decent little business, being run in a very Leo way. And that’s the whole point. The numbers are important, sure… but context is king. You need to know who’s in the business, how reliant the whole operation is on them, what their exit plan is (if they have one), and what they think their business is worth (which is often somewhere between “retire forever” and “cover a decent weekend away”). You’re not just crunching numbers, you’re translating their story into something that makes sense to the market. That’s where a good valuer earns their keep. (I hear that Brett Goodyer is an incredible valuer and people say quite the hunk to boot. Ok, my wife says that, but she’s people too). Because anyone can examine EBITDA, not everyone can look at a business and see the hidden risks, the quiet value, or the red flags waving from the back office. And this is where accountants have a massive advantage, because you’ve often been there the whole time. You’ve seen the late lodgements, the weird spikes, the steady growth, or the slow bleed. You know what’s under the hood. Your job now is to take all that insight and turn it into a valuation that holds water. That starts with the right questions. Not just “How much did you make last year?” but “What would happen if you stepped away for three months?”, “Who are your key clients?”, “What are you doing that no one else in your space is?”, “What’s keeping you up at night?”, and my personal favourite, “What’s the weirdest expense in your accounts that you’ll try to justify to me?” That last one usually opens a very interesting can of worms. Once you know the story, you can then choose the method. Sometimes it’s capitalisation of future maintainable earnings, sometimes it’s a discounted cash flow, or maybe net asset backing. Sometimes it’s just taking a deep breath and gently explaining why their “gut feel” valuation, which was based on what their mate Dave got for his café in 2012, might not stack up today. The real art is in helping your client see their business the way a buyer would, not with rose-coloured glasses, but with curiosity, caution, and a calculator. And that shift only happens when you’ve taken the time to understand their world… not just their numbers. So next time you’re asked to do a valuation, don’t open Excel first. Start with a chair, a chat, and maybe even an old-world notepad. Ask questions. Listen attentively. And then, once you’ve got the story straight, then you can get to the numbers. Trust me… Leo’s parrot would agree. Try BVOPro For Free

If you’ve ever been involved in a business sale that felt harder than it needed to be, there’s a good chance the business structure had something to do with it. I’ve seen deals drag out for months, and I’ve seen them fall over entirely, not because the business wasn’t viable, but because the legal and tax structures weren’t built to support the transaction. Most of the time, these problems are avoidable. If someone had looked under the hood early enough, they could have been fixed well before they derailed the deal. When a business is being valued for a sale or a succession plan, structure stops being a legal formality and becomes a valuation input. Because the second you involve multiple entities, unusual trust setups, or retained earnings floating around in places it shouldn’t be (or deployed in investments that have nothing to do with the business itself), you’re introducing friction. And friction kills deals. It complicates tax, it slows down due diligence, and it adds cost. Buyers don’t love complexity… they discount it. And that means it eats into value. From a valuer’s perspective, clean structures make life easier. It’s faster to work out what’s being sold, what it’s worth, and how it’ll transfer. For instance, consider an NDIS business that operates out of a Discretionary Trust. Given that NDIS accreditation is not transferable, NDIS business sales are generally executed as the sale of a corporate entity, whereby shares are transferred from seller to purchaser, rather than as a business assets sale. This is because the entity that is accredited (the company) can change hands without the business being interrupted. The introduction of a trust creates complexity. It adds more steps and uncertainty… which reduces value. This is where accountants are in a unique position. Most of these problems aren’t necessarily legal problems; they’re timing problems that will likely need the assistance of a commercially minded lawyer at some stage. The structures that create headaches at sale time probably made sense at the time they were set up, but what worked in year three doesn’t always work in year thirteen. Unless someone flags that along the way, the business can walk into a sale unprepared. And that’s where you, as the adviser, can make a difference. If you spot the cracks early, you can help your clients address them before they manifest in some undesirable way. Restructuring too late almost always means paying more. And yes, restructures can be a pain in the arse, but that’s nothing compared to trying to sell a business that can’t legally be sold in its current form, or whose contracts are not legally transferable. Once a buyer is at the table, it’s often too late to move the pieces around without triggering tax consequences, blowing out timelines, or spooking the buyer altogether. I’ve worked with Joanna Oakey from Aspect Legal, and she’s got no shortage of horror stories from owners who left it too late. The tax consequences alone can run into millions of dollars. But restructuring early, or doing it without context, can cause damage too. That’s why it is important to have an experienced, commercial team with the expertise required involved as early as possible. It’s not about accountants trying to be lawyers. It’s about making sure the right people are at the table at the right time, and that the structure actually supports the strategy. So when you are looking at a business, considering its structure and quietly second-guessing yourself, then ask someone to assist. Don’t just nod along. Talking to someone with specialist tax, structuring, or legal expertise is always worthwhile. It can save your client thousands, and in some cases, millions. If you need a referral, just hit me up. A good specialist will always tell you when something is outside of their wheelhouse, so don’t be afraid to put together a team of experts that you can call on when you need their help. I’ve seen deals completely change from one insightful conversation with the right tax expert at the right time. Transactions we are seeing in large numbers lately are employee buy-ins. At first glance, they seem pretty straightforward. The owner wants to step back, the staff want to step up, and continuity is preserved. But the reality is usually way more complicated. These deals are often staged, involve vendor finance, include complex shareholder arrangements, and sometimes blur the lines between leadership and ownership. The team dynamic can be severely tested. People who used to be colleagues now have skin in the game. And if you don’t get the details right, the deal can unravel just as quickly as it came together. What usually happens is that everyone agrees in principle, shakes hands, and only then do they start looking at how it’ll actually work, which is quite simply arse-about. You need to know what’s being sold, how it’ll be valued over time, and what happens if someone pulls out or underperforms. If the valuation is going to change year to year, how’s that handled? If someone leaves midway through the deal, do they still get their shares, or are they sitting in some type of Unit Trust off to one side? If the funding is reliant on future profits, who carries the risk if those profits don’t show up? These aren’t just legal questions. They’re valuation, strategy, and culture questions. And most of the time, the accountant is the only one with the whole picture and is the trusted adviser to the business and owner.   You know the people. You’ve seen the numbers. You know the structures (or lack thereof). You understand the levers. That makes you the perfect person to raise the awkward questions, even if you’re not the one answering them. Because if no one’s asking those questions early, they tend to become problems later. The bottom line is this: structure can either help or hurt value. It’s not just background noise. If the structure is messy, outdated, or doesn’t support

By Brett Goodyer, FCPA B.Com M.ForAccy – Forensic Accountant, Business Valuer, Bullshit Slayer Think you can knock out a business valuation with a spreadsheet template and a few formulas? It’s the stuff between the formulas that adds meaning to your work. Let’s call a spade a spade… spreadsheets have become the crutch of modern business valuations. I’m not saying I don’t love a good spreadsheet… I mean, I’m only (a nerdy) human. I’ve spent my fair share of nights wrestling in the ‘sheets’ with nested formulas and cascading errors. But the uncomfortable truth is that a spreadsheet isn’t a valuation system. It’s a tool that can be a risky if you don’t know exactly what you’re doing.I’ve lost count of how many times I’ve seen a valuation that’s little more than a few cells multiplied by a random multiple. One tab, two assumptions, and zero context. And a valuation of $13 million…The calculations might be technically correct (in as much as 1 + 1 = 2), but they’re built on a pile of undocumented risk, unfounded assumptions, and a whole lot of “I reckon”. The issue at hand is not just about the numbers, it’s about the blind trust we place in them. Once figures are entered into a spreadsheet, they seem to be sacrosanct. You’ll hear things like, “But my calculations in the attached spreadsheet indicate the business is worth $2.3 million!” and, whilst the appropriate response should be “Bullshit”, you should respond with something like “That doesn’t seem quite right. Could you explain your reasoning behind your numbers”. It’s important to remember that the spreadsheet simply performed calculations based on the data provided. And numbers on their own can’t consider business risks, procedures, and how the business operates. The numbers can tell a very different story without the insight of someone who knows better. And as accountants, you know better. You’ve got access to the story behind the numbers. You see the client’s behaviours, their systems (or lack thereof), their cash flow habits, and their team. You know who’s flying by the seat of their pants and those select few that operate like a well-oiled machine. But the spreadsheet doesn’t capture any of that, unless you build it in. A spreadsheet ‘valuation’ is the modern equivalent of a ‘back of the envelope’ estimate. It lets you skip the hard questions. You aren’t required to assess specific risks like “are these earnings sustainable?”, “How dependent on the owners is this business?”, “What level of working capital does this business need to continue to operate?” or “Is this stockpile of inventory helping or hurting the business?” And without considering these (and lots of other risks), we aren’t really thinking about the story behind the numbers. And let’s not ignore the risk to you as the adviser. If you’re using an old spreadsheet your predecessor handed down, or something you found online that promises ‘quick valuations’, you’re taking on all the risk of getting it wrong, without any of the control. One broken formula or wrong assumption, and suddenly your credibility is on the line. That’s why I built BVOPro. Not because I wanted to sell software (though it’s nice when people subscribe), but because I wanted to build myself a tool that let me scale my valuation business without losing sight of the narrative behind the numbers. I needed to build structure into the process, not just the outputs. By collecting and assessing information on the risks inherent in each business I was able to understand so much more about the business from the outset that would let me shape my view of the business. It let me adjust the earnings of the business and consider an appropriate capitalisation rate, expected return on investment, or market based multiple. It doesn’t force me to adopt the predictions of my algorithm, but it does prompt me to ask the owner more questions, to delve into the story some more, and then present my findings in a consistent, evidence-based way that I can explain to anyone. A valuation isn’t solving a maths problem. It’s applying a structure to an unstructured problem in a consistent, academically sound manner, that provides an answer that makes sense within the context of the narrative of the business and current market. But most importantly, it needs sound professional judgement, and an ability to weigh up the qualitative factors that spreadsheets don’t handle well. Using a spreadsheet or software that serves up an answer without your ability to consider the context and exercise your own professional judgment is just using a complicated calculator. If you’d like to do valuations faster and more efficiently, head to www.bvopro.online and sign up for a free trial of BVOPro today. Try BVOPro For Free

By Brett Goodyer, FCPA B.Com M.ForAccy – Forensic Accountant, Business Valuer, Bullshit Slayer Let’s start with the thing no one wants to say out loud: if you’re calling your valuation “accurate,” you’ve already missed the point. Unless you have a crystal ball, a time machine, or the ability to control what buyers think, you’re not valuing a business, you’re making an educated guess. And that’s okay. Because a business valuation isn’t about arriving at a single truth… it’s about using structured thinking and solid judgment to give someone the best answer we can, given everything we know right now. I once had a client, an engineer, funnily enough, who nearly short-circuited when I told him the final number I gave him wasn’t “precise.” He’d built a career out of tolerances, blueprints, and control systems. He wanted the valuation to be like a circuit diagram; if X goes in, Y comes out. But business doesn’t work that way, especially for small businesses.   You see, every valuation starts with assumptions. Assumptions about risk, future earnings, about buyer appetite, and the economy not imploding next Tuesday. You can absolutely apply the maths properly, and you should, but the maths is only as good as the thinking behind it. The model is science. The inputs are art. And the art? That’s all you. That’s why two valuers can value the same business and land in different ballparks, and both can be right, if they’ve explained their logic well. What matters is not the number. It’s the story that the number is telling. This is where accountants have a huge opportunity. You have the trust, the history, and the insight that most brokers and consultants lack. If you take that and combine it with the ability to tell a coherent, well-reasoned valuation story, you become invaluable. You’re not just handing over a number, you’re helping your client understand what drives that number and what they can do about it. A strong valuation says, “Here’s the value we’ve arrived at, and here’s why it makes sense.” Not just technically, but commercially. It should anticipate the client’s objections, explain the choices, and hold up under scrutiny. That’s what makes it defensible. That’s what makes it worthwhile. Because let’s face it, this isn’t a completely academic exercise. This is real business. The valuation might be used to negotiate with buyers, resolve disputes, or justify investment decisions… If you’ve just plugged a few figures into a template without considering the bigger picture, you’ve done your client a disservice, and you’ve left yourself exposed if things go sideways. I know it sounds like I’m downplaying the technical side. I’m not. The calculation matters. But it’s the lens through which you apply that calculation that makes all the difference. That lens is shaped by experience, instinct, and the ability to connect the dots between the client’s reality and the economic landscape.The more you develop that lens, the better your valuations will be. Not more “accurate”—just more useful. More insightful. More able to help your client take action.And look, the truth is, this job can be messy. You’re often valuing businesses that don’t even know where half their revenue comes from. You’re interpreting spreadsheets written by someone who thinks “miscellaneous” or “suspense” is a valid profit and loss line item, not a red flag. You’re reading the tea leaves and hoping the market doesn’t shit itself next month.But that’s the gig.If you embrace the uncertainty, trust your process, and keep the story front and centre, you’ll deliver something far more valuable than a fancy report—you’ll give your client clarity.And for me and what I do, clarity is gold. Try BVOPro For Free

Business valuations can be complex, and the rules can be hard to pin down sometimes. There are many business valuation methodologies that can be employed, aimed at determining the value of the enterprise. They are usually prepared on the basis of a hypothetical arm’s-length sale to a ‘willing but not anxious buyer’ purchasing from a ‘willing but not anxious seller’, where the parties are acting in good faith, with good information at hand. This is known as a fair market business valuation. However, what is not immediately evident from this description is that the business (or enterprise) being valued only the assets required to operate the business going forward, not everything that’s on the balance sheet! These assets are often known as the operating assets or business assets. The only liability that would ordinarily be included in the valuation is trade creditors, and even then it is only included if it is lower than the trade debtors, so that the surplus of debtors over creditors provides the new owner access to working capital. However, most business sales (as distinct from share sales) are transacted on a basis of ‘no cash, no debt’, meaning that the assets included in the sale would be limited to items such as plant and equipment, inventory, motor vehicles (that are used in the earning of income), furniture, fixtures, and fittings. All other assets and liabilities would ‘stay behind’ in the hypothetical sale, and the seller would be responsible for extinguishing any debts and realising any assets themselves. This can add some complexity at the time of sale if any of the assets that form part of the sale are financed and are used as security for that finance. It is therefore critical that discussions are held with your accountant, solicitor, business broker, and your lender prior to the transaction to ensure that you are able to simultaneously settle any secured debts on the sale of the business. When determining the value of shares in an entity, the steps are slightly different, but start from the same point. Firstly, a business valuation is performed exactly as it is above, and then we work out how much goodwill (if any) that the business possesses, and then that gets added back to the balance sheet exactly as it is, including all of those surplus assets and liabilities that would not be sold with the business if it was sold separately. However, SMEs will often possess a bunch of related party debt or assets that need to be removed from the company before the shares are transferred to its new owner. In this case, those surplus assets and debts don’t just ‘get left behind’, they have to be extinguished or transferred out of the entity, before the shares are sold. It is this rationalised (or adjusted) balance sheet that sets the price of the shares. Again, this is where you need to talk to your accountant, solicitor, business broker, and lender(s). Debt is a complicating factor in business valuations and entity/share valuations but getting the right advice from skilled professionals can mean the difference between a smooth, profitable, easy transaction, and well… the opposite! Value My Business Now

Small to Medium Enterprises (SMEs) can take many forms; some are better suited to your needs than others. In an ideal world, the best operating entity structure for your business will be put in place before you’ve made your first dollar, but I think we can all agree that such an outcome is highly improbable.. The best thing a new business owner (or prospective business owner) can do, is to seek the advice of a skilful accountant to attain tailored advice on the entity structure that best suits their needs at the time, given their particular set of circumstances. Bearing in mind, of course, that the structure that suits you best today may not be the best structure in 5 or 10 years’ time. Restructuring is a thing for good reason! In some circumstances, a simple sole proprietorship may be sufficient (where you operate under your personal name), whilst others may call for a company. Still, others may require the shares in your company to be held by a trust for ease of distributing the proceeds of your business in the most tax-effective manner… perhaps you’d have a corporate trustee for that trust. Maybe you’d have multiple companies, with one owning the operating assets, one trading the operating business, and one employing your staff… You could have another entity owning the goodwill or any trademarks you’ve developed… and all of those can be held by multiple entities and trusts. You can add to this the potential of partnerships of individuals, partnerships of trusts, partnerships of companies, and we haven’t even talked about unit trusts yet… it gets complicated pretty quickly. And each layer adds complexity and compliance costs. Quite simply, the structure that is suitable for you is not necessarily suitable for someone else or for another business, and often structures evolve, and not necessarily in an orderly or even appropriate manner. So, restructuring your business, whilst sometimes an expensive exercise (when you factor in potential capital gains tax issues, advice, and compliance costs), it can be much more costly to do nothing. For example, suppose your business has been happily trading in a trust or company for some time, and you are looking to sell in a little over three years. In that case, it is probably a good idea to talk to your accountant to see whether you need to restructure your business now to avail yourself of potential capital gains tax concessions, that could save you anywhere up to $1 million in tax on the sale of the business. It really is worth a discussion with your accountant… Accountants are often under-utilised, with their services limited to helping businesses stay compliant and deal with emergencies. But they are capable of so much more if you simply avail yourself of their strategic and tax planning skill set. And when it comes time to value those businesses, entities, or shares so that the restructures are tax compliant, we will be there to help you and your accountant. We can help make the complex as simple as possible and arm you with the best information to make the best decision that suits you and your business. Value My Business Now

When it comes to assessing the value of accounting practices, the valuation process can often become a labyrinth of confusion, particularly when distinguishing between valuations of a business, an entity, and a book of clients. Ironically, accounting practices, which serve as trusted advisors in their field, are frequently valued using a shortcut methodology known as the Industry Rule of Thumb (IRT). The IRT methodologies are a common practice for valuing businesses or entities within a specific industry. Instead of relying on precise calculations, this approach draws upon past valuation experiences and estimations within the industry that have generally come about over many years. IRT valuations typically involve using relevant multiples tailored to the specific industry in which the firm operates. For instance, small to mid-sized accounting firms are often valued based on a multiple of their revenue (typically ranging from 0.7 to 1.2 times the revenue). In the case of accounting practices, the IRT valuation method is not really valuing the enterprise of the accounting firm but assessing the value of a bundle of fees generated by a group of clients, reflecting their annual revenue contribution. It is important to note that the valuation focuses on recurring revenue, considering it as an asset of the business or entity. Thus, the valuation process does not encompass the entire business itself. Different practices possess distinct costs and risk profiles and operate in various geographical locations, each with its unique economic influences, and by applying an IRT revenue multiple, the specific risks of the enterprise of operating that accounting practice are entirely ignored. The most appropriate approach to valuing an accounting practice should involve a methodology that captures future earnings after paying the operating expenses that it must incur to attain those earnings as well as factoring in the particular set of risks that the business faces. This can be achieved through the capitalisation of future maintainable earnings method, which incorporates a capitalisation rate tailored to address the specific risks associated with the individual practice. Navigating the intricate landscape of accounting practice valuation demands a delicate balance of expertise, insight, and a deep understanding of the industry. By harnessing the power of accurate valuation methods, businesses can comprehensively understand their value and make informed decisions for long-term success. So, whether you seek to value your accounting practice, navigate industry norms, or comprehend the true value of your client base, embracing effective valuation techniques will empower you to unlock the true potential of your accounting practice. Value My Business Now

A commonly employed approach to business valuations is the Capitalisation of Future Maintainable Earnings (CFME), which establishes the business’s value based on a multiple of its earnings. So, lets delve into the intricacies of earnings multiples and their significance in business valuations. The CFME methodology hinges upon estimating the business’s Future Maintainable Earnings (FME) and capitalising them at a suitable rate. This rate considers various factors, including the business’s outlook, risk profile, investor expectations, growth prospects, and specific (and often unique) attributes. Analysing comparable market data is crucial for effectively implementing this approach. Business valuations can therefore be heavily reliant on FME, which can be derived from measures of earnings such as Net Profit After Tax (NPAT), Earnings Before Interest and Tax (EBIT), or Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA). EBIT multiples can vary significantly based on industry, performance, and the relative risk associated with the subject business. Typically ranging from 0.8 times FME to well north of 5 times FME, EBIT multiples provide insights into the value of a business. In general terms, businesses with an annual turnover of less than $5 million often sell for less than 3 times EBIT, and those with a turnover below $1 million may struggle to achieve a 2 times EBIT multiple. As the turnover surpasses $5 million, businesses become more likely to attain multiples exceeding 3 times. Exceptional qualities that distinguish a business from its competitors are necessary to command a higher multiple. Of course, different industries exhibit varying earnings multiples, thus it is often difficult to compare businesses across differing industries. Some sectors witness higher multiples, indicating lower perceived risk, while others experience lower multiples, suggesting a higher degree of risk. Additionally, market dynamics and unique circumstances can lead to businesses being sold at bargain prices or premium valuations. Consequently, considering these factors is vital when determining an appropriate earnings multiple and conducting accurate business valuations. At its core, the earnings multiple reflects the inherent risk associated with a business’s ability to maintain its current profit levels. A higher multiple implies lower risk, indicating a greater likelihood of the business sustaining its projected earnings. Conversely, a lower multiple suggests higher risk and uncertainty regarding the business’s ability to maintain its profit level. Wrapping your head around earnings multiples and what they really mean is essential for understanding the intricacies of business valuation. The CFME methodology provides a robust framework for estimating a business’ value based on its earnings multiple. By considering factors such as business outlook, risk profile, growth potential, and industry-specific dynamics, analysts can accurately estimate FME and determine an appropriate capitalisation rate for the business in question. The take-away is this: the earnings multiple is an estimate of the level of risk exhibited by a particular business sustaining a particular level of profitability. Armed with a thorough understanding of earnings multiples, business owners and investors can make well-informed decisions regarding buying or selling a business. Value My Business Now

The term goodwill gets bandied about a lot in the business world, but I find it is often misunderstood. There are a few definitions, but generally only two of them apply in a business sense: the favour or advantage that a business has acquired especially through its brands and its good reputation the excess of the purchase price of a company over its book value which represents the value of goodwill as an intangible asset for accounting purposesSource: https://www.merriam-webster.com/dictionary/goodwill accessed 24 November 2022 Strangely enough, they are both correct… However, whilst goodwill does relate to the advantage enjoyed by a business due to its good reputation and brands (amongst other things), it does not have any value unless it satisfies the test set out in the second definition! If there is no excess in price (or valuation) over book value, there is no goodwill detected. So, one definition describes the nature of the beast and the other provides the accounting-based determination of how to recognise its presence. There seems to be a school of thought that a business must possess goodwill simply because it might own a pretty website, or maybe an Instagram following of 1000 people, has 5-star Google Reviews, owns a patent, or that its people possess some specialist knowledge or edgy haircuts. However, a business does not possess goodwill just because one or more of those (and many other) things are present. It doesn’t exist just because you think it ought to! Simply put, goodwill is the difference between the sales price of the business and the fair market value of its assets used in earning business income. Goodwill is a mathematical formula. The formula is simply telling you what a prospective purchaser would pay over and above the value of your assets to own the business… the difference is a measure of just how badly they want it! Unfortunately, many business owners get the wrong end of the stick when they try to work out what their business might be worth. For instance, I have seen many valuations where businesses are being valued by attempting to determine the value of goodwill and then adding that amount to the value of the assets of the business. This is in fact the direct opposite of how goodwill is calculated. Goodwill is intangible. You can’t touch it, see it, smell it… so how can you work out what it’s worth? The answer is surprisingly easy: you work out what someone would pay for the business, you work out what the value of all of the tangible assets are, and you take them away from that purchase price. What’s left is that murky, intangible thing that we call goodwill. You can’t even look at it for fear it will slink away… it is simply that mysterious. If the purchase price changes by even one dollar, so does the goodwill. If the value of the other assets forming a part of the sale changes, so does the goodwill… They are each intrinsically linked, and goodwill cannot exist independently of the other two. OK, so I have probably got a little too passionate about the definition of goodwill there. Anyway, moving on… I’ve lost count of the number of small business owners who have come to me asking to have their business valued and are surprised when I tell them that their business either does not possess any goodwill or that it is minimal. I’m not going to get into the nitty-gritty of how a business is valued or the various methodologies that can be adopted in valuing different businesses. This is neither the time nor the place. Instead, here are a few (general) home truths for why your business might not have any goodwill: If the business is mature and has a history of being unprofitable or highly volatile, it likely does not possess goodwill. Nobody wants to buy a business that they then have to put extra money into each year. If you are the business owner and do not draw a commercial salary for the work you do in the business, I will remove a commercial salary from the profit of the business. If there is now no profit, refer to Tip 1. No one should have to pay a multiple of their own salary to purchase a job. And no one wants to buy a business that does not make a profit. Telling me that the business could be profitable if the purchaser was to invest in marketing, change the business, or some other way of creating profit, you are likely telling me this because the business doesn’t make a profit. Refer to Tip 1. You are selling your business as it is right now, not some fantasy version of what the business could be under certain circumstances. If your business owns a patent, trademark, or other intellectual property but does not make a profit, refer to Tip 1. Sure, you might be able to sell the patent or trademark if it has some value to a third party, but the business doesn’t seem to be benefiting from it, and thus it does not possess goodwill. Just because there is a line item called goodwill on your balance sheet, does not necessarily mean that your business still possesses goodwill. The real question is does the business make a profit? If no, refer to Tip 1. Just because your business has allowed you to live a comfortable lifestyle does not mean that the business possesses goodwill. Often business owners have been pulling out way more from their businesses than they ought to, creating large shareholder loan accounts. Once again, does the business make a profit? If no, refer to Tip 1 You can’t expect to use your business as a vehicle for personal expenditure and tax minimisation and expect a valuer or prospective purchaser to ignore the financial results you have communicated to the tax office. Refer to tip 1. Obviously, there are exceptions to these ‘Tips’. For

As a business owner, sometimes there can be a bit of ego involved. The business is your baby, you built it, you’ve worked hard, and you are the backbone of that business. And there really is nothing wrong with that… except when it comes time to sell it. To understand how the value of the business can be affected by its reliance on the current owner you need only consider the proposition from the viewpoint of the potential purchaser. It’s basically like saying to them “I want you to buy this business at a premium price, but first I am going to fire the key employee before the sale’. Would you buy that business? I know I wouldn’t. Some businesses are completely unsellable because the business is entirely reliant upon the owner’s skill set, relationships with customers, knowledge of a particular product or service, or any other number of things that only the owner possesses. If it isn’t going to be left behind in the business once it is transferred to a new owner, why would they pay for it? Well, in short… they won’t. But the real kicker here is that reliance upon the owner does not just affect the value of the business in the open market, it also affects the business every day. The reliance upon one person in a business can impact the viability of the business itself. In some cases, an owner is the only person capable of signing cheques and processing payments, there is little if any delegation of key tasks, and as a result the growth of the business is hampered due to every complex decision needing to be reviewed and approved by the owner. This creates a bottleneck and means that the owner has to be involved at every step… and there is always a point at which that starts holding back the business. Having a strong, competent, empowered management team in place in a business means that any owner or prospective owner can confidently leave the day-to-day management of the business to the team. Its effect is twofold: It releases the owner from the day-to-day work whilst it also frees them up to start to work on business strategy to grow the business, and it significantly increases the value of the business due to the reduced risk caused by non-transferable owner expertise. So how do you grow that strong, competent, empowered management team that is going to make such a difference? Well, the owner first needs to determine what it is that they do every day. Once they work that out, the tasks that can be easily delegated to existing staff should be delegated! For more complex tasks they need to work out what their core competencies are so that they can find and hire new staff who possess those skills. For instance, they could include marketing, finance, sales, or technical staff. Finding the right staff can be tricky and time consuming. Sometimes it feels like you are paying someone else to do a job you could do faster and more efficiently and cheaper yourself. But stick with me… it is totally worth it! Once you have the staff, you need to mentor and train them so that they’re doing the job that you want them to do, and then actually delegate to them (and stop doing it yourself). The owner should then be a resource that the senior management team can turn to when they need guidance, rather than being the engine room of the business. When the time comes to sell the business, any prospective purchaser will see that the business can be operated without any owner involvement, and as such can be purchased as an investment at an arm’s length rather than as a prospective full-time vocation. When assessed by business valuer, the presence of a good management team is indicative of a lower transfer risk to a purchaser. Many business owners will read this article and think to themselves ‘that is all quite obvious’. But in the last 1,000 odd business valuations I have performed, I could count the number of businesses that operated without the owner working in the business on my fingers and toes. Value My Business Now