First lets understand what Goodwill is. In financial terms, Goodwill is the difference between the company value and the value of its tangible assets net of liabilities. You estimate the total company value and then you deduct the liabilities and the net book value of all tangible assets and the remaining (if any) is the value of Goodwill. In some circumstances the company value is less than its asset book value, so there is no goodwill value remaining.

While technically correct, this definition doesn’t seem very intuitive. How could goodwill have no value or even have a negative value? All this reputation over the years is certainly worth something. The problem is that it is worth something only if somebody is willing to pay something for it. If the seller is lucky enough to find that rare buyer who desperately needs this goodwill for whatever reason, they may get a lot of money for it.

However, when a business broker evaluates a company, they are looking for a fair market value of the business and certainly not a low probability price that sellers might get if they are so lucky that there is a unique buyer desperately in need to buy their business even at above market value. Fair market value is mostly based on the earning ability of the business not the book value of its assets.

In many circumstances, especially for Businesses with valuable tangible assets such as equipment, stock, receivables etc., the earning ability of the business hardly justifies a price higher than the book value of its assets. In these circumstances we can simply say that the buyer is not paying for any goodwill.

How can business owners maximise the value of their goodwill?

If owners increase or maintain their profits while reducing the value of their tangible assets, they can get a much higher value for their goodwill and could end-up with a much higher total proceeds from the sale of their businesses. Below are some concrete suggestions:

1. Modernise stock management and reduce stock to its minimum level while maintaining good customer relationships.
2. Increase machinery utilization and sell any unused/low utilization equipment.
3. Offer customer incentives to reduce payment terms and reduce the need for working capital.
4. Negotiate better terms with suppliers to increase accounts payable.

While I recognize that these suggestions are very difficult to implement in practice, owners can make some bold strategic choices that will make the above suggestions easier to implement. Choices include focusing on the 20% customers that produce 80% of the margins, limiting the number of SKU’s to a smaller more manageable number, standardizing products and/or services offered, increasing marketing and focusing it on the targeted profitable customers etc.

Three unique aspects make selling a business in Toronto much easier and more lucrative than in most other cities in North America:

• Ethnic diversity of its population: Diversity is good for business and can make markets much more liquid (frequent transactions). Different ethnic populations have different perceptions of happiness and different needs, so a business that doesn’t fit with people from a particular ethnic background might be an excellent fit for another ethnic background. For example gas stations and convenience stores require long hours of work and provide a relatively low return on investments. In spite of these disadvantage, these businesses are in great demand especially from recent immigrants. A number of recent immigrants lack language skills to operate a business with high social interaction so they perceive this type of businesses as ideal. Moreover the lack of job opportunities leave them with few other options. And finally sometime larger families provide buyers with a cost effective labour advantage.

• Immigration: Canada is one of the very few countries that is very open to immigration. One of the possible options for new immigrants is the purchase of a business that employs Canadian residents. This option is however underused since most immigrants use other options available. Moreover, immigrant coming to Canada are more entrepreneurial  by nature (otherwise they would not have risked everything they have to come to Canada). Very frequently, they choose to buy a business quickly after realizing that their future as employees might not be as bright as they expected.

• Concentration of population: A large market is generally more liquid than a smaller one. The number of business owners desiring to sell and potential individuals and/or companies looking to buy increase the possibilities of matching buyers’ and sellers’ needs.  As a good analogy, finance professionals know that large capitalization (total company value in the stock market) companies  have more liquid stocks than small capitalization companies.

For all these reasons, it’s mach easier to sell a business that is located in Toronto than a business in a small town in North America. Furthermore, even business valuations are higher in Toronto. Liquidity increases price. A buyer will offer a higher price if he/ she knows that it will be easier to sell the business if it ends-up been not what they expected it to be.

Unfortunately, not all business sellers take advantage of  the Toronto advantage when they sell their businesses. If the business is not exposed to the market for a reasonable time with adequate advertising then it will not sell for the best possible price. unfortunately, business owners selling with no professional help end-up leaving a lot of value on the table.

As a first approach, we suggest that a business owner contemplates these questions:

• Why would you sell your business?
• Are there other options available?
• What is your plan after selling your business?
• What price do you expect to sell your business for?

This introspective thinking will help the owner decide whether selling the business is the way to go. Owners can also  seek professional help from business brokers. I receive frequent questions from potential business sellers who are in the early stages of their decision. In many cases my advice to them is to explore their other options since selling their business appears not to be the optimal solution. Surfing the Internet searching for blogs and websites providing information about the business sale process can also be very helpful in understanding the preliminary concepts.