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 email@example.com 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.
See you again soon,
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Why Do I Do This?
Josh Horn, CPA/ABV, CVA created Build a Valuable Business for serious private business owners who consciously seek to build valuable businesses. It is not for those who want to pursue old ideas or do things the way they’ve always been done. It is not traditional accounting services. It is not seasonal. It is not cookie-cutter. There’s a big gap between CFO and value-building resources available to private and publicly-traded businesses. My aim is to fill that gap for the private business owner who doesn’t have a CFO on staff. My passionate pursuit is to give private businesses access to a strategic CFO and the tools to build a business that grows to become a world-class asset with international impact. Here, we focus on increasing your business value as the primary goal. The achievement of that goal is realized when your business is always “sale-ready”, doesn’t require constant attention, and your owner hours are dropping while your business cash is rising. My clients want a business that gives them options, a good quality of life, and plenty of time with their families. Who is helping you build your valuable business?
Josh is a licensed Certified Public Accountant (CPA) and double-credentialed in business valuation (CVA & ABV). He’s been a tax and business consultant in a top 100 CPA firm and a controller in a large international company. He’s also valued and been the primary advisor to multi-million dollar and small companies in various industries.
“To everything your business can be with a little help–for you, your family, and your employees. I wish you all the success and happiness you can imagine.” Josh Horn, CPA