How do I calculate goodwill ??

Discussion in 'Accounts & Finance' started by PA Ryan, Sep 6, 2010.

  1. PA Ryan

    PA Ryan UKBF Newcomer Free Member

    Posts: 7 Likes: 0
    Hi

    I want to buy a window cleaning business that a sole trader has been running for a number of years.

    There are no assets- it is really the goodwill that has been built up over the years. He does not have formal contracts with companies or individuals, but is the reccommended window cleaner in 3 estates of exspensive and good sized flats.

    How would I estimate the goodwill? I guess that is really all there is in the business to put a value on??

    Thanks for any help- much appreciated!!

    Ryan
    Posted: Sep 6, 2010 By: PA Ryan Member since: Sep 6, 2010
    #1
  2. robindunne

    robindunne UKBF Newcomer Free Member

    Posts: 147 Likes: 21
    All depends if there is an active market for that kind of business.

    In the absense of an active market, only you can decide what price you're willing to pay. In the accountancy profession, accountants do sell blocks of fees, and the accepted principle is that price should be somewhere between 1-1.5 times the annual fee income.

    Maybe that approach could be an apporpriate way to value a business of that kind.
    Posted: Sep 6, 2010 By: robindunne Member since: Sep 1, 2010
    #2
  3. MyAccountantOnline

    MyAccountantOnline UKBF Legend Full Member

    Posts: 9,835 Likes: 1,930
    Hi Ryan

    For tax purposes you can look at a number of ways of valuing goodwill - as far as making an offer for the business its what you are prepared to pay. What is it really worth to you? Are the customers going to stay with you if you buy the business? Do you actually need to buy the business - would the customers change to you if you offered your services to them?
    Last edited: Sep 6, 2010
    Posted: Sep 6, 2010 By: MyAccountantOnline Member since: Sep 24, 2008
    #3
  4. PA Ryan

    PA Ryan UKBF Newcomer Free Member

    Posts: 7 Likes: 0
    Hi - your comments are appreciated- I have been reading up on the web (god, a little knowledge is such an dangerous thing!!) and I think this would come under the category of personal good will.

    He has worked with the 3 estates and his customers for a long time, so I don't think I would be viewed very fovourable if I "muscled in)!

    I understand that accountants will charge between 1 to 1.5 times the annual fee income. That seems a little high? Also, for a service industry - would a multiple of profit be away to go???

    Best

    Ryan
    Posted: Sep 6, 2010 By: PA Ryan Member since: Sep 6, 2010
    #4
  5. robindunne

    robindunne UKBF Newcomer Free Member

    Posts: 147 Likes: 21
    Whilst doing my exams there was an entire section on business valuations, which goes into all kinds of accountancy models. I won't bore them with you, but you really need to think about the income it will generate you and how long that income is likely to last.

    Basically you're buying an income stream, so the amount of the income stream must have some say on the price you pay.
    Posted: Sep 6, 2010 By: robindunne Member since: Sep 1, 2010
    #5
  6. PA Ryan

    PA Ryan UKBF Newcomer Free Member

    Posts: 7 Likes: 0
    Hi

    Any ideas on a multiple of turnover that may be appropriate in a small business like this? Or should it be profit???

    Your help is much appreciated!!

    Best

    Ryan
    Posted: Sep 6, 2010 By: PA Ryan Member since: Sep 6, 2010
    #6
  7. David Griffiths

    David Griffiths UKBF Legend Moderator

    Posts: 10,373 Likes: 3,287
    There is no rule for a small business like this. You might use a multiple of profit after deducting a fair salary for the business owner - in most cases there would be nothing left to multiply.

    You are really down to horse trading. The vendor wants money for his "round". Either you are prepared to pay it or you're not. If might be worth something for the equipment, list of customers and agreed visits schedule - it depends if that's higher than the cost of shoe leather in knocking on doors and asking for business.
    Posted: Sep 6, 2010 By: David Griffiths Member since: Jun 21, 2008
    #7
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  8. Tom McClelland

    Tom McClelland UKBF Ace Full Member

    Posts: 2,892 Likes: 789
    I think David has hit the nail on the head. You're buying a trade, not a business, IMHO, and it would be very easy to overpay for rounds where there is no contract with the clients. The "favoured supplier" of the blocks of flats could change tomorrow.
    Posted: Sep 6, 2010 By: Tom McClelland Member since: Feb 10, 2008
    #8
  9. PA Ryan

    PA Ryan UKBF Newcomer Free Member

    Posts: 7 Likes: 0
    Hi thanks so much for taking the time and trouble to respond to me- you have been very helpful.

    Best

    Ryan
    Posted: Sep 6, 2010 By: PA Ryan Member since: Sep 6, 2010
    #9
  10. Rhodes100

    Rhodes100 UKBF Newcomer Free Member

    Posts: 673 Likes: 134
    With a small business like this I might actually suggest that the goodwill is negligible if the owner has not established a business that is not reliant on himself. In effect he has created a job for himself.

    If you were to buy his customer list you would need to calculate whether these people would be likely to stay with you, perhaps they just liked him so the goodwill is not business goodwill but personal goodwill. In other words when he disappears would the same turnover be achieved.

    As a business transfer agent I would argue that there would only be goodwill if he was earning more than he would do if he got a job cleaning windows. And as you were paying him effectively for next years income, whether these customers would be likely to stay.
    Posted: Sep 9, 2010 By: Rhodes100 Member since: Feb 19, 2009
    #10