Goodwill
The part of a business's sale price that is not accounted for by its physical and identifiable assets — what a buyer pays for the earnings the business will keep producing after the sale.
If a business sells for more than the total of its identifiable assets — equipment, stock, property, receivables — less the liabilities the buyer takes on, the difference is goodwill. It is not a fiction and it is not sentiment: it is the price of an established stream of earnings that a buyer would otherwise have to spend years building.
What creates it is fairly specific. Customers who return without being re-won. A name that generates enquiries on its own. Staff who know how the work is done and intend to stay. Systems that mean the work happens the same way whoever is holding it. Contracts and agreements that carry across to a new owner. These are the things a buyer cannot purchase separately.
What quietly destroys it is the subject of most of the difficult conversations in a sale. Earnings that depend on the departing owner. Relationships held personally rather than by the business. Knowledge that lives in one head. Records that cannot be verified. A buyer does not argue that these things have no value — they argue, reasonably, that the value leaves with the person, and so it is not theirs to buy.
For an owner not currently selling, goodwill is still the most honest scorecard available. It is the measure of how much of what has been built exists independently of the person who built it.
What it tells you
How much of the business would survive your leaving — which is the same question as how much of it is genuinely worth something to anybody else.
See Exit Ready →See also
Owner dependency
The degree to which a business only functions because the owner is personally in it — holding the knowledge, the relationships, the decisions, or the work itself.
EBITDA
A measure of profit that strips out interest, tax, depreciation and amortisation, in order to show what the trading operation earns before financing and accounting decisions are applied to it.
Cap table
A record of who owns what share of a company, including everything not yet issued but promised — options, convertible notes and agreed future allocations.
A definition tells you what the word means. It can't tell you whether it's your problem — that takes a look at the actual business.
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