By far the biggest part of the purchase price of a small family business is goodwill. So it is vitally important to a buyer to have knowledge and understanding of just what goodwill is and how to place a value on it.

This is the final in a series of five articles on valuing goodwill and discusses other factors that affect the valuation, including buying in a recession.

The Seller’s Personality, Work Ethic and Management Skills

This factor is one that cuts both ways. If the seller has abysmal people skills and/or is running the business into the ground because of poor management, then you are in the box seat to get a bargain – that is of course provided that your skills are better than theirs and the situation can be retrieved.

It’s very dangerous for you however if the owner is the best in the business, works ridiculous hours, is loved by their customers, and will be sorely missed. If you realistically can’t match this level of expertise, personality and dedication, you may buy the business at its peak and watch it go downhill from there.

This situation is so serious that I have on occasion recommended to clients to totally withdraw from negotiations and not buy the business under any circumstances. 

Being constantly compared to Superman can be demeaning and demoralizing and downright depressing when you see the sales start to slide.

If the business is being badly run, then value it at what it is worth now – not at what it could be if turned around – and stick to your offer. Sometimes sellers like this get aggrieved at a low offer in this situation because it is less than a similar business down the road. This is often because they are too dense to see that it is all their own fault.

In the Superman situation it’s very hard for you to win. If you make a lower offer than the valuation to try and compensate for the seller’s departure, it’s unlikely to be accepted because of other buyers in the wings. And even if it was, you really don’t need the kind of aggravation that would result when you took over.

Local Factors

This is the place to bring up the other things you found while checking out the business for traps.

A big franchised competitor may be moving in nearby, a new shopping centre may be underway in a near suburb, a new highway may cut off or reduce your access and/or exposure.

If you feel these events will affect the future profitability of the business, make an assessment of the damage and adjust the goodwill accordingly.

Buying in Times of Recession

This is the big one and is striking fear into the hearts of everyone as I write this. That’s why I have left it until last.

Some would say you would be mad to buy a business in the middle of a recession. Others would say it is the best time to buy one, just like buying shares when the stock market is low. “Buy in the gloom, sell in the boom” as the saying goes.

Put yourself in the seller’s shoes. If you were the owner of the business (and maybe you are!) would you sell it right now if you had a choice? No way! You would hang on grimly until the dark clouds lifted and the sun starts shining again.

Because you know that at the moment there are very few buyers out there and you might have trouble even giving the business away.

There are three things to remember about a recession. It will not last forever, not all businesses are adversely affected, and there are a lot of people who lose their jobs who may receive big termination payouts.

Every time there is a stock market boom people say, “This one is different. It will go on for years”. Every time there is a bust, they say, “This one is different. We’ll never get out of it”.

This article was written by Brian K Fitzgibbon CPA.

Brian is an experienced accountant and small business consultant. He runs his own business, lectures extensively on small business topics and has checked out and valued many hundreds of small businesses for buyers.

Brian is also the author of the highly acclaimed and invaluable
"How To Value A Business And Buy It Without Fear"
A do-it-yourself guide for first-time and experienced buyers alike.

To download a FREE Chapter from Brian's book please follow this link: "HowToValueBusiness.com"

August 28th, 2009 | Tags: assessing risk, business valuations, buying a business, buying in a recession, checking out a business, components of goodwill, definition of goodwill, diy business valuations, due diligence on a small business, goodwill valuation, how to buy a business, how to value a business, local factors in buying a business, small business risk, the sellers personality, tips on buying a business, valuing franchises, valuing goodwill in a small business | Category: articles | Subscribe to comments | Leave a comment | Trackback URL  |