Recently, I’ve run into some situations where someone was trying to value a business by cobbling the assets together as the only method. This is Part 1 of a series addressing goodwill in a business.
Picture a business as a plain old plastic bucket. And into that bucket, we’re going to pour things like industry expertise, a talented workforce, and maybe some patents or trade secrets. Then, we’re going to take our “business bucket” and go out into the world and start “watering seeds” and watching the business grow. Can you see the stuff we put in our bucket? No, you can’t see it. Is the bucket much more valuable than the empty piece of plastic we started with? You bet. And that’s what goodwill is. It’s that “invisible stuff” that is not recorded on the business’ books and records but drives a good portion of the business’ value.
Why is this important when valuing a business?
- A business can easily represent over 90% of a family’s net worth.
- Unless the business is worth more “dead than alive”, if you value it using only the visible assets, you’ve valued the empty bucket. You’ve massively undervalued the business and forgot about goodwill. (Identify)
Why is this important in a family law (divorce) setting when a business is an asset?
- If the business has goodwill, you may be required to determine how much there is to meet the standards of your jurisdiction. (Quantify)
- You may then need to split the goodwill into enterprise and personal pieces. Why? Because enterprise goodwill is marital property and personal goodwill is not marital property in states such as Illinois where I live. (Allocate)
Business valuation skills and judgement are essential to identify, quantify, and allocate goodwill. Not knowing how to handle goodwill will cost you big time.
If you’d like to see this concept above on video: https://goo.gl/y2Q6qA
If you’d like to see a video of how to quantify goodwill: https://goo.gl/aUds5k
If you’d like to see a video of personal goodwill factors: https://goo.gl/VhRKVz
Or email me at firstname.lastname@example.org and I’ll send you all 3 video links in secure and downloadable format. Let me know if you want to talk about goodwill in business valuation or family law.
Call me if you would like to discuss valuing a business in divorce or litigation.
Joshua L. Horn, CPA/ABV, CVA
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Horn Valuation is for attorneys, judges, and business owners who believe there’s an easier way to settle business disputes and want to work with a valuation expert using fixed fees. I’ve been a CPA since 1999, a certified valuation analyst since 2008, and valued mom and pops to multi-million-dollar businesses. Call me today if you’re interested in working together on a valuation solution.