Valuing business goodwill Part II – 8 factors that create institutional goodwill
We talked about the factors that create personal goodwill in small businesses and professional practices. The key takeaway is that personal goodwill is associated with the individual practitioner, not the business organization.
In contrast, institutional business goodwill arises from the business or practice itself. This is the type of goodwill that you can transfer easily when the business or a partner’s share sell.
Increase total business value by building the institutional business goodwill
One value-enhancing strategy you can follow is to make sure that the large part of goodwill is created by the business or practice itself. This is known as the institutional goodwill. So which factors indicate this important type of business goodwill? Here is the list:
Top 8 factors that create institutional business goodwill
- Quality and skill of employees.
- Business reputation.
- Business name recognition.
- Competitive postion of the business or professional practice in its market place.
- Location of the business premises.
- Business referral base.
- Stability of earnings.
- Business marketability.
How the 8 factors affect the value of business goodwill
It goes without saying that skilled, long-term staff is the major asset in any business or professional practice. If such employees remain with the practice after key partners depart, the new owners acquire the considerable benefit of trained and assembled workforce. The result? A higher value of business goodwill and the entire business enterprise.
Focusing on building the reputation and name recognition of the business tends to attract loyal customer following. The clients come to respect and prefer the company as the product and service provider. Needless to say, this translates into higher earning potential – and higher business goodwill.
If your business or professional practice has built up a set of sustained competitive advantages, it probably enjoys superior earnings – through lower costs and greater pricing flexibility. Above average earnings are a key element in creating business goodwill over the long term.
Excellent location makes the business more visible and accessible to its target market. The result is often strong repeat and referral business. Good location also tends to help reduce the marketing expenses.
You need to understand if new client referrals come because of the business reputation, rather than an individual practitioner. Should the expert depart, the clients will likely keep coming. Such client retention is the major contributor to the business goodwill.
Stable business earnings indicate the staying power of the business or professional practice. Business people pay attention to historic earnings stability to predict what is likely to happen in the future. Again, this future earnings outlook indicates how valuable the business is.
If you find a strong market for existing businesses in some industry, buyer competition tends to increase business selling prices. Remember that the value of business goodwill is the difference between the total business value and the appraised value of its assets. Hence, strong competition among the buyers – and higher business selling prices – point to higher value of business goodwill.