Goodwill in life and business

One of the most misunderstood concepts in business concerns our perceptions of ‘Goodwill’.

Perhaps good will means that one thinks good things about someone else and we ‘will’ our positive thoughts and actions so that others get warm and fuzzy - just from our mere brain waves.  Nice!

On the other hand, perhaps it’s how we view ourselves through someone else’s eyes?  Perhaps we have spent years being nice to someone so that they in turn think good things about us?  In this case we have spent time and effort doing whatever it takes to make others think nice things of us.  Good!

For example, families and friends take real work to remain family and friends and dare I say the development of mutual goodwill is a key ingredient.  The bonus is when all of a sudden those obviously recalcitrant family dropkicks respond with equally magnanimous gestures, we have indeed developed goodwill and the world is a joy and we bathe in those esoteric warm and fuzzy self gratifications.

This is also the case in business.

We spend time and effort and money convincing others that they should spend their discretionary dollar with us and not that horrible bloke down the street.  In effect, we are developing goodwill.

In rather blunt terms - in business and in life goodwill can be defined as that ….

“Intangible benefit of reputation relative to that benefit being of value to another party.”

When this applies to a business the ‘goodwill’ component is the value of the reputation of the business.  This may result in increased revenue and may even result in long term benefit.  We hope!!

On the contrary, an empty premise has no goodwill from clients but may have a measure of ‘value’ based on its location, neighbours, etc.  However, a premise in distress has negative goodwill because its reputation has been sullied.  Logical, really.

When selling a business, goodwill is not an accounting sum associated with excess earnings.  Whilst accountants will want to put a quantifiable figure on goodwill, there is far more involved.

For a business sale, there can never be guarantees of future income streams because there are a myriad of factors outside of the control of the seller to even be able to logically or legally guarantee. Therefore, excess earnings as a determinant of business value is a nonsense.  It is merely one factor of many.

When buying a business, of far greater value is the way in which customers view their relationship towards the premise, its reputation and indeed their willingness to continue that relationship without having to rebuild a reputation from scratch or far worse, from a negative.  Bloggers as real and vitriolic customers have changed the face of goodwill in business – for the better!!

In essence, goodwill boils down to the willingness of people to continue a relationship with the new owner.  The business may have great excess earnings but has just blotted its copybook by poisoning the neighbours.  On paper it’s worth dollars but in reality worth squat because of the salmonella cookies.

When buying a business the only consideration is, ‘can I be successful ‘.  To do that the value of committed clients is crucial and has a dollar value.  That value cannot be logically calculated albeit bloggers have made that much easier by their transparent and public opinions.

But then, every blogger may love a certain business but it still doesn’t work for whatever reason.  May I say that the value of the goodwill is still strong and doesn’t change but the overall business value is mitigated by a straight revenue valuation.

So, goodwill is esoteric, unknowable and incalculable yet it has value because it means customers will come and try the new person in the new business.  A head start on bankruptcy.