How Goodwill and NAV Affect Company Valuation and Sales

There are two key elements which make up the valuation of any business: the Goodwill and the Net Asset Value (NAV). Each of these needs full consideration to ensure that the right offer price is reached for a company.

The more conservative buyer may look more for companies with a high NAV, the more adventurous acquirer will be more interested in goodwill. In this article, we will explain the nature of Goodwill and NAV and the place they have in a business valuation.

Grasping the basics

NAV is your assets minus your liabilities. Assets such as buildings, machinery, computers, debtors, and stock are all tangible products that have an intrinsic value. Liabilities such as accounts payable, debt, mortgages, deferred revenues and loans are deducted to give a true reflection of your company’s’ asset value.

Goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value. It is the value of a company’s brand name, customer base, future growth potential, customer relations, employee relations and any intellectual property such as patents or proprietary technology.

Fluctuations

Tangible assets can be valued very easily and without a great deal of fluctuation in the price regardless of who values it. For example, if you have an office which has been valued at £300,000 by a commercial property agent, then if you go to another agent the price may only fluctuate by +/- 5%.

Aside from buildings and equipment, the NAV is also made up of, as mentioned earlier, items such as debtors and loans which have an assigned price that is fixed and does not fluctuate, if business A owes business B £10,000 then that is the price, it does not change depending on who looks at it. So the very nature of tangible assets and liabilities makes the NAV steady.

Therefore NAV will never be multiplied when it comes to valuation because the assets can only be sold once and whilst stock might be written down, or vehicles depreciated, the NAV is a snapshot of what could be disposed of today on the open market if the trading part of the enterprise stopped.

Goodwill, on the other hand, is intrinsically more subjective. What is valuable to one person won’t be to another. A patent, for example, is only valuable to you if you know how to use it to develop a product and then sell it on. The potential growth of the business might be stated as 50% over the next two years but if you don’t agree, that in turn reduces the value in your opinion.

However, Goodwill is also the main driver of growth within a business and really generates the value for the owners. Which is why when it comes to selling a company, Goodwill is often multiplied to reflect the future year on year yields of the trading of the enterprise.

Is my valuation NAV or Goodwill heavy?

Understanding all of this, some businesses will, by definition, be more NAV heavy, and others will have their value largely made up by Goodwill.

Manufacturing businesses, wholesalers and retailers are good examples of businesses whose valuation will be asset heavy as they are involved in the buying in of materials or goods, repackaging in some form, and then selling them on. They carry large amounts of stock, have a large property portfolio and often also carry a significant amount of machinery and vehicles.

Whereas the services industry tends to be mainly Goodwill dominated. For example, a technology business involved in software development could have physical assets of a few laptops and office equipment. But if the software was popular, with a large number of high-margin retained clients, then it could command a high valuation made up almost entirely of goodwill.

So how should I value my Company?

Assuming that your NAV is relatively settled, then the main consideration will be your Goodwill and what kind of multiple needs to be applied.

For most SME’s, the goodwill valuation works on a multiple of the adjusted EBITDA. That multiple, generally, increases as your EBITDA increases, so a business with an EBITDA of £1m will command a multiple of around 4-5 times, whereas a business with one of £250k will normally have a multiple of 2-3 times.

There will, of course, be exceptions to this rule. In all situations though, whatever sector you’re in, the business is worth as much as someone is willing to pay for it, and so when valuing the goodwill it’s important to come to a value that isn’t just what you as the business owner believe it’s worth, but what the market believes the goodwill is worth.

Here at Firm Gains, we believe that our independence means that we can carry out fair and reasonable market valuations. These valuations will give you a true reflection of what your business would sell for on the open market, taking into account the historical trading of your business, and also the future growth potential.

To enquire about valuation, or to receive expert advice, contact us on 0333 050 8225.