Are you considering selling your business? Have you found a good purchaser and negotiating a purchase price? Many factors are taken into account when the business is being valued, however, one of the key assets that a business can sell and that it is valued by is its goodwill. Often, the division of the purchase price is made up by calculating the cost of plant and equipment, with the remainder attributed to goodwill. It is important that, whether you are the purchaser or seller of business, you understand the concept of goodwill. Below, we set out what is goodwill and what issues you should consider.
What is Goodwill?
There is no definitive description of goodwill, however, in legal terms, it is a type of intangible personal property as determined in Inland Revenue Commissioners v Muller & Co’s Margarine Ltd [1901] AC 217. Usually, goodwill cannot exist separately from the business that it is connected to.
Goodwill often divides into ‘local’ and ‘personal’ goodwill. While local goodwill is based on the physical location of the business, personal goodwill is dependent on the skills, reputation, and customer base of the business owners. While the location is key to running a successful business, it is important to note that a high level of personal goodwill is also needed to ensure your business has good value.
Why is Goodwill Important?
For a purchaser, goodwill is an essential component of the business. Without goodwill, the business is reduced to its physical components, which is often just an office and some stationery. It is important that goodwill is protected during the running of the business and the sale. Note that the Standard Sale of Business Contract 2015 has a clause that states the vendor must maintain the goodwill of the business and carry on the business in a proper way until the completion of the sale.
Issues to Consider
The elements that make up goodwill will vary according to the business. Factors that may be relevant towards determining the goodwill of a business include:
- Status/reputation of the business and its brand name;
- Continuous use of the name after completion;
- Intellectual property, including patents, trademarks, designs or other distinguishing logos;
- Restraints of trade by the seller;
- Employment of key employees after completion of the sale;
- Introduction to customers and inclusion of customer lists on completion;
- Quality of customers;
- Ongoing success or profitability of the business.
Key Takeaways
Evidently goodwill is not the only thing that makes up the valuation of business. However, it is a key asset that a business has. To make sure your business sells at a good price, you should consistently work to protect your goodwill. If you are a purchaser, it is important to ensure the seller maintains the goodwill of their business until completion. If you have any questions about selling or buying a business, our business lawyers can assist.