[Closed] buying a loss making business - goodwill!

Of course goodwill is subjective. Does the business have a client base you'll get as part of the purchase or is it a very well known business locally/nationally that makes what they're asking for in terms of the goodwill worth it? If the answers no then make them an offer based on what you value it at and go from there, the alternative is get it valued professionally or get some diligence done via some advisors then you'll know if what they're asking for is realistic.

The owners have had it valued, but my guess is they then added the goodwill they paid for it 8 years ago (when it was profitable).
Client/customers base would go there no matter who owns it.... (possible more customers if someone else own it)...

Why is it making a loss? And how is this connected to the goodwill?
What is the make up of the goodwill?

I do m&a work and will happily have a quick look tomorrow if you want to email the accounts and more background to the pros and cons of owning the business. You can remove the company name if you wish

As far as I can make out the the current owners reduced the trading hours as a lifestyle choice and so customers are going elsewhere as the shop has become unreliable.
Based on my (very limited) knowlegde goodwill is added to the asset value, to get the buisness overall value. Usually, if it were a profitable business you'd add between 4 and 8 times the annual net profit. But because the buisness is currently trading at a loss it makes determining the goodwill more difficult - essentially the value current value is only in the assets.
Being generous based on the last four years profit / loss I'm thinking 20k which is Much much less than current owners paid several years ago (when it was profitable).

Thanks jp-t385 - I may do that after the weekend if that's ok. Going to have a 'chat' with the owners first.

Thanks jp-t385 - I may do that after the weekend if that's ok. Going to have a 'chat' with the owners first.

I'd also wanting to breakdown what they consider to be goodwill. Customers left because of trading hours. What makes you think they'll come back? The barnd obviously isn't that strong otherwise the customers would be going out of their way to buy. Anything else?
At the end of the day it's what you think it's worth and what you think the business is worth and it's like any other purchase. The sellers shouldn't be offended by an offer, it's business. Get them to justify the figure they're asking, then make a decision.

Seems like some confusion re "goodwill" and any basis for valuation IMO

Assets alone do not tell you/us anything. Start perhaps with the net assets ie assets minus liabilities and then you can starts to have a realistic debate about goodwill. But I doubt that this is a balance sheet driven business so you focus instead should be on the P&L and cash flow. Why is it making losses? What is its cash flow like? Etc

I would take the kind advice offered above if I as you.

Goodwill relates to the premium paid to net assets not total assets (ie minus liabilities). And would reflect normally the excess returns over the cost of capital in the business (none in this case)

The amount paid would not be 4-8 x profit above this value.

IMO, take pro help

Also, don't take the asset list and book value as gospel. Check everything exists, is of use to your plans, and what it is worth to you / available on market for. Plenty of places have had overvalued assets on the books come sale time.

If you set up a business from scratch you have to build up a client base and reputation before you make a sales and so profit. If you buy a running reputable business you acquire that ready profitable income stream. Goodwill is the financial measure of that benefit . If the business is loss making you are not getting that benefit so unless the turnaround will be as simple and as immediate as staying open longer then the goodwill is negligible. When I did solicitors accounts training (badly) goodwill was usually valued at three years profits .
I appreciate my understanding is very simplistic but I think you should be pitching the goodwill very low,and getting dome professional advise.

the trick with buying a business is to remember your need to get it for as little as possible anything more than that and you ve made a gift of it to the vendor because your soft.

first up.. do you need to buy this business to run a business doing the same thing? what of the assets will actually be assets to the business when you own it ( will you need those boxes of cack that have been at the back for 5 years.. no and just remove them from the value..only buy what you want..)

goodwill.. there is none the business has been run down ( no matter how romantically you wrap up lifestyle choice the business has been run down..)

so buy the stock/assets you need at trade prices or less.. just say you dont want the rest.. their making a loss they ll be glad to move it to anyone.. be hard..would you rather you spent the 20k on your kids or they enjoyed their retirement..

I'm an accountant and echo what THM, Oldbloke and Crankboy have already said. You need to analyse the previous 3 years accounts although I would look at the last 5 years. Start with variations in the Gross Profit and work your way down to the Net Profit. Any negative variations should be queried with the seller.
If you are happy with the explanations then check the assets making sure they exist, work, valued correctly (£10k of assets use eBay as market price valuation) ensure they are no charges on any if the assets too.
You also need to know if your buying from a sole trader or a limited company. With the later if it has a loss on the balance sheet and with any goodwill you purchase it could be years before you're able to take a dividend.
If it is a sole trader and the accounts aren't prepared by an accountant you have no guarantee on the accuracy of them and I wouldn't offer any more than the net asset worth.
Obviously use an accountant or solicitor to do a due diligence on a limited company as you wouldn't want to find out that you suddenly have creditors chasing you for monies owed that weren't entered in the books at the time of purchase or that the debtors don't exist.
Change of lifestyle leading to losses would make me twitchy as someone is paying for that loss be it the owner, creditors or massively overstocked with obsolete goods.

Its not a bikeshop is it? Not a £%&#@ chance I'd go into a bricks&mortar bike shop.

Stop thinking in terms of a fomula for getting a valuation, and stop worrying about what might offend the current owners, and instead put your common sense hat on.

What are the tangible assets (i.e real physical stuff) that they have worth to you, and the business that you plan to run?

And what are the intangible assets worth to you? i.e. if they have existing customers, how long would it take you to build up that customer base if starting from scratch?

There is no one formula that will give you the answers to these questions.

The last business that my company bought, we paid about 1 x turnover and in accounting terms that was almost entirely "goodwill" as it was for the customer base. That was for a subscription-style service, where most customers will renew by default. We had a think about how long we retained customers for on average, and how much we'd make out of them in that period. We did some sums and came up with a figure.

They've run the business down so its a bit rich to expect a substantial goodwill figure.
Don't be sympathetic. Business can be harsh. The less money you pay for it the more is in your pocket.As far as i can tell its the value of the assets only because its YOU that will be putting the time and effort in to bring it back to profitability.

The current owners of the business are trying it on by adding "good will" . They've run the business down and are just adding it on in an attempt to recover some of their losses.

Its not a bikeshop is it? Not a £%&#@ chance I'd go into a bricks&mortar bike shop.

Seems a shame as you're so experienced at buying and selling bikes.

Goodwill is the amount you have to pay to buy a business over it's true worth.... Just work out it's value to you then make an offer related to that, then negotiate as required.

I used to work in the M&A sector too, until banks stopped lending, retail sales are a minefield, my free advice would be to look at the costs to start something up yourself, rather than buy a bundle of headaches.

"Its not a bikeshop is it? Not a £%&#@ chance I'd go into a bricks&mortar bike shop."

lets be honest - you would be a shop owners worst nightmare if you ever stepped foot into a bricks and mortar shop 😀