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Can you sell a business made entirely of goodwill?

Do you own a business without any major assets such as property or significant machinery? Some business owners worry that without large assets, they will find it difficult to sell business goodwill. This isn’t true. In fact, almost all businesses are sold on the basis of their goodwill, with the assets added as a given. There are still a number of questions that are often asked, in this blog we try to answer them.

How is business value calculated?

First let’s start with the basics of the issue, the valuation of a business. When valuing a business, the equation used is often: EBITDA*multiple + NAV. Where EBITDA is ‘earning before interested, tax, depreciation, and amortisation’ and NAV is ‘net asset value’.

The multiple applied in this equation increases as the business in question grows in size or potential. So that a larger price is paid for businesses that are more likely to generate a return. For a business with an EBITDA of £100k it may only be 1.5, but for a business with an EBITDA of £1m it could be 4.

What we can take away from this is that the NAV is an addition to the valuation and can often be dwarfed by the goodwill of a business. Even with a large property on the balance sheet.

Do buyers want to acquire large assets?

Buyers who are concerned about the possibility of selling their business without large assets are assuming that these large assets are actually attractive for business acquirers.

Acquirers have a budget when going into the process, and large commercial property is expensive. Acquirers would like to spend their budget on the best trading business possible, that will give them the best return on investment.

As you can see in this diagram, if an acquirer has £2m to spend on an acquisition, they could acquire two types of businesses. Case 1: a NAV of £800k (which includes a property) and an EBITDA of approximately £500k, or case 2: a NAV of £50k (not including a property) and an EBITDA of £800k. Clearly, case 2 offers a better trading business and a shorter return on investment, for the same price.

When acquiring, a business will also be very keen to achieve a suitable return on investment (ROI). Having a long ROI means more uncertainty for the acquirer. A situation that businesses are always trying to avoid. By having your NAV as a large proportion of the acquisition price, you are increasing the time it takes to see a full return. This is due to the relatively slow increase in value of commercial property.

The value of commercial property is stable and is likely to increase steadily over time, maybe 4-5% a year. However for an acquirer, the opportunity to acquire more goodwill is incredibly attractive and gives them a better chance to grow it exponentially, possible upwards of 20% a year.

Will it depend on the type of buyer?

The type of buyer will affect how your lack of large assets is seen. The most common buyer for a business is a trade buyer in your industry. These trade buyers are seeking many things: more customers, reach into a new market or location, or the skills of employees in the target business.

What is low down on many lists is the acquisition of a new property, they can do that through an estate agent. They want to acquire goodwill, not more assets. In fact, in our conversations with acquirers, if a business comes with a large property asset, it is often more of a hinderance then a positive.

Trade buyers act differently to private buyers

But, as with everything in business, there are not strict rules. There arestill situations where an acquirer wants to look for a property asset within the business. These tend to be private equity businesses and other entrepreneurs who are acquiring from outside the industry. They want to acquire a business that has the goodwill potential to grow. However, if their gamble doesn’t pay off they have a significant asset to fall back on. This isn’t the attitude of many trade buyers.

So if you have a business whose value is largely consisting of goodwill, then do not fear. Trade buyers will be interested in acquiring your business for what you can add to their business without the hinderance of a large asset to deal with or dispose of.

Speak to the independent experts

If you want to speak with independent experts in M&A who can help you with your business exit strategy, contact us today on 0333 050 8225. We will discuss your options and advice you on the best route to exit.

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