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What is Goodwill in Business Sales? How to Buy a Business. How to Sell a Business. - YouTube
Channel: Peter Nola
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buyers and sellers often worry about
goodwill
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you'll regularly see a large component
in a sale price and it's called
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goodwill now goodwill means different
things to both
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buyers and sellers and they both have
their own concerns
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so let's have a look shall we what does
goodwill mean to both
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buyers and sellers
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to sell a business a seller needs to
confront the need to provide
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confidential information to potential
buyers
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now potential buyers could be
competitors or opportunists
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looking to get some advantage from the
information since competitors are often
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the most suited buyer
and an opportunist is difficult to
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distinguish from a genuine buyer
it pays to proceed with care
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a standard precaution is to ask
interested parties to sign
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a confidentiality agreement also called
a non-disclosure agreement before
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providing that party with any
commercially sensitive information
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a business broker or your lawyer will
usually assist with this aspect
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the terms of a confidentiality agreement
are typically
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not contentious so they're unlikely to
deter
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any genuine buyers i talk about
confidentiality and disclosure in
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business
sales up here have a look at those
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another precaution is to disclose
confidential information in
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stages the levels of information
provided could vary depending on the
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type of business
and the number of interested parties the
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first stage could involve providing
basic details such as turnover gross
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profit
information together with details of
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lease of the premises etc
the first level of information should
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enable the buyer to make a conditional
offer the terms of that offer would then
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determine
whether it was worth proceeding to the
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next round of disclosure
with that party now this process should
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reduce the number of people that see the
most sensitive information of the
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business
to only those who have a realistic
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prospect of
making the purchase they've made a
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conditional offer and
lodged a deposit into the brokers trust
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account
managing this process is essential in
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ensuring the sale happens
but without damage to the business
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something a skilled business broker
should be very very good at
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the amount of goodwill as a percentage
of the total price
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varies but it is commonly a significant
component
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for that reason buyers are often
sensitive to the need to ensure that the
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goodwill is transferred to them on
sentiment
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goodwill can be contained in a number of
areas of the business
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including
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now a standard sale and purchase agreement
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will often deal with
most of these items perfectly adequately
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but it's certainly worth reviewing the
business during due diligence with the
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focus
on where the goodwill is concentrated in
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the particular business
that you're looking at to find out if
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the business and consequently the
goodwill of the business is
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too reliant on the owner's performance
have a look at this video up here that
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should help
in carrying out due diligence on a
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business buyers should identify
whether there are written contracts and
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whether those contracts are capable of
being assigned
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there may be a case for inserting
additional clauses to cover
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any issues with the assignment of
contracts and include
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formalising the old owner's obligations
to help
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make this happen now contracts can often
be relationship
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based and sometimes very hard one so
it's important that the owners of the
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business
agree to one or a straight of trade
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clause and two
how they're going to transfer those
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contracts in a general rule the
enforceability
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of a restraint of trade depends on the
scope and scale
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the price paid and the amount of
goodwill
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sometimes goodwill is calculated with a
reference to turnover
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a buyer will have expectations that
turnover will be at existing levels or
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better going forward
now the seller typically warrants
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historical figures
are accurate but makes no representation
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or warranty about
future turnover that can make a buyer
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understandably nervous and from time to
time buyers will negotiate what's known
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as an
earn out provision to mitigate the risks
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of turnover failing
now an earn out provision structures the
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deal so the seller
only gets more than the buyer's offer if
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the business achieves
turnover targets post settlement
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now whichever route you take preserving
the goodwill and enabling the transfer
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of that goodwill to a new owner
should always be an important
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consideration in
any business sale thanks again for
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watching
if you want to know more about business
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sales maybe you want tips on improving
your business start right now
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hit that subscribe button if you like
the video
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comment down below i read and reply to
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every comment and i would love to hear
from you
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until next time see you then
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