Goodwill gone bad!

Looking for Goodwill in all the wrong places.

In a previously written article on this blog I detailed some of the pitfalls of franchising a business. I wrote specifically about Satan and the loss of quality control and customer satisfaction when his services were rendered by the franchisees versus Mr. Pitchfork himself. Now let’s look at a scenario where the Devil has decided to call it a millennium and retire. He is going to sell his business and must now go about the task of figuring out the valuation of his enterprise.

There are many ways to value a business for sale. Usually the first step is to set a value on the tangible assets of the business. What is the current value of the plant equipment, real estate and inventory?
Add it all up and make an offer. This is usually the course of action when the business for sale is a money loser. When a company is in the red, goodwill usually does not come in the equation when valuing the company. It is difficult to make the case that the proprietor’s glowing personality is worth “X” amount of dollars when the cash flow is a negative number. In this situation goodwill simply does not exist or it’s really bad good will or simply, “bad will”.

This clearly is not the situation in Satan’s case. His inventory of souls is mind boggling. Possibly in the billions. His plant and office equipment, real estate and other holdings are fairly easy to set a value to but what is the overall value when you consider his “goodwill”? As we discovered, when he stepped away from the business of direct soul collection the image of his company took a measurable hit. Now let’s look at his business when he reasserts himself back into the business as the primary rainmaker for his company. He is his business and his business is him. Customers pay for and expect the kind of service that has lead to his name, in all its forms, to span the globe in many different languages and religions. This intangible quality is goodwill and in Satan’s case his goodwill might be so overpowering as to me immeasurable.
His may be one of the few cases where the goodwill is such an intricate part the business that a price tag cannot be applied to the value due to the fact that no matter how much was paid, his level of service could not be duplicated so it could very well turn out to be a losing situation for the purchasing entity.
In Satan’s case, it appears, goodwill indeed exists but because he’s so good at being bad that the premium he would add to the purchase price of his business based on his goodwill would probably make the venture unattainable if not simply a bad investment decision.

The existence of goodwill, in my opinion, is not in question. Whether goodwill is always a good thing is another issue. If the goodwill is tied more the personality of the seller of a business then a significant part of the buyer’s due diligence should be paid to investigate whether they can duplicate the service or even if it is worth trying. An example would be an old neighborhood bar that has had the same owner for 50 years. There is nothing in the quality of the alcohol he sells, nor the price in which he sells it or the ambiance of the establishment that separates it from his competitors. Neighborhood folk come to his bar because he tells a great joke or offers a shoulder to cry on. If he leaves, so may the customers.
Again, the goodwill exists but might not be worth pursuing.

Now let’s look at the flip-side where personalities do not play a part but the product produced is where the goodwill is derived. A local sausage making company has been around for 25 years. It has a great book of tangible assets such as a wholly owned plant and equipment, inventory and office supplies and it’s greatest intangible asset is the reputation it has for making the best sausage in the world. The recipe for the sausage is a tangible asset but the consumers love of the sausage is goodwill well worth calculating into the purchase price of the business. Here personalities are not involved and, with proper training, the name and the reputation of the business as well as continued customer loyalty can transfer to the new owners.

Goodwill is a very important part of assessing the value of a business for sale. It is calculated by the seller by adding the amount the seller believes his goodwill is worth to the fair value of the net assets of the company. The Buyer, through his due diligence, must determine whether that premium is worth the price.