Contact us about a general enquiry.
Unlock your cash flow potential. At Yorkshire Bank we take a flexible approach to business borrowing.
Lending is subject to status and eligibility.
< back to all business news articles
27/09/2017
Goodwill is often a big part of a business's overall value, and one of the hardest to calculate. Unlike tangible assets such as equipment which is easier to value, it's not easy to put a price on the reputation you've built up with your customers and suppliers.
Goodwill is an additional payment for a business over and above the net assets (add up all the assets and deduct the liabilities). It tries to reflect you’re buying a business as a ‘going concern’, with things like existing cash flow, loyal customers, processes and supplier agreements and great staff already in place.
When you’re working out goodwill it’s likely to be more if the business has:
The better these are, the more goodwill. And vice versa of course.
It can be a complicated process, and different methods will give different results. Ultimately the value is what the marketplace or buyer is willing to pay, regardless of what you may think.
This is the simplest and a common method to calculate goodwill, where goodwill is equal to the average profits for a set time period, multiplied by the number of years you think the previous owner’s goodwill will last, i.e.,
Goodwill = Average Profits X Number of Years
Step 1:
Decide on an average profit over the last few years by reviewing the Profit and Loss Account. Check your numbers. Make sure that you take the following into account:
Step 2:
Estimate how long you believe the ‘goodwill’ of the current business will last. If the business is a ‘turn key’ business where it’ll make money for 3-5 years without you needing to change anything, then multiply the average profit by 3-5 to get a goodwill amount.
At the opposite end of the scale is a business which has either very low or no profit, or the business needs significant improvements. In this case the goodwill may be zero.
You don’t have to pay goodwill. If you’re buying the business and the goodwill is excessive, ask yourself if it would be cheaper and better to start from scratch. It just may well be.
There are a number of other methods such as:
The methods described are the most common ways to value goodwill in a business, for both buyers and sellers. However, you are best to seek the help of professionals such as specialist industry business brokers, accountants or business advisors to determine the best way to value goodwill.
POSTED IN: Finance advice,2017
SHARE
You are here: Business Banking > Business News > Articles
To log into Internet Banking you now need to use Virgin Money Internet Banking. You'll get the same great service and are able to access all your accounts.
Your log in details will stay the same and you can log in directly from the shiny new Virgin Money website.
Continue to Virgin Money Internet Banking
Go to the Virgin Money websiteNever tell anyone a token 3 response code, even someone from the bank. You should only input these codes to our secure Business Internet Banking service when you’re sending and making payments. If anyone calls and asks for a token 3 response code or asks you to authorise a payment on the App for fraud checks, hang up and call us on 0800 085 2914 from another line if possible, remember the Bank will never ask you to disclose your security details.
Continue to Virgin Money Business Internet BankingYou can find impartial information and guidance on money matters on the “MoneyHelper” website.
Yorkshire Bank is covered by the Financial Services Compensation Scheme (FSCS), Find out more.