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Commercial Goodwill

Definition - What does Commercial Goodwill mean?

Commercial goodwill is a quantification of the benefits that buyers obtain in an acquisition including the acquired company's brand, established client relationships, operational and financial processes, trained and experienced workforce, industry know-how, and other advantages of an established business. It is generally recognized that commercial goodwill follows the business, can be transferred to different owners and, therefore, can have material value. The value is a function of the degree to which goodwill is sustainable and its inherent effect on the future earning potential of the business.

Divestopedia explains Commercial Goodwill

Commercial goodwill is very difficult to calculate. Rather than quantify the value of commercial goodwill separately, valuators usually back into the goodwill amount by determining the enterprise value of the business and deducting the tangible net assets. Often, little work is performed to assess if the goodwill is sustainable and transferable to a prospective buyer, which is a critical missed step to determine whether a company's goodwill has any market value at all.

It is well documented that valuable and sell-able businesses should operate without needing the owner at the helm. The concept of commercial goodwill is closely tied to this opinion. If the owner is a big part of maintaining relationships with customers, delivering quality service, driving revenue growth and so on, then goodwill is tied to the owner and not the business. In this instance, the maximum value of the business to a buyer may only be the value of the tangible assets if the owner is unwilling to stay.

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Resources

  • Equicapita: Equicapita
    Equicapita's model is to acquire established, private small and medium sized enterprises (“SMEs”) located primarily in Western Canada.
  • Evolution Capital: Evolution Capital
    Leaders in growing small business.