Tips for Paying for Goodwill
During my holidays recently I saw some change near where I lived and it prompted me to put pen to paper. A favourite restaurant for many families in the area sold towards the end of 2017. It was the talk in the coffee shops, of what will happen, what would it become, will the name change, will the same staff remain, will the owner stay on? These are all really good questions which apply to any business, especially real estate or property services businesses. We all know that most of the value in the business i
s in the rent roll. So why would you pay more than the value of the rent roll, i.e pay for goodwill?
I've sold many real estate businesses and I can give valid reasons and arguments why you should and why you shouldn't pay for goodwill. Here are my tips on when buying a real estate or property services business on paying for goodwill.
What is Goodwill? Goodwill when buying a real estate business or any other property services business, is the non-tangible feeling or attitude to that business. Ultimately you are paying for the reputation of that business. It's important to establish early on what you're paying for. The rent roll or strata roll has a tangible value align
ed to the managing agency agreements and the landlords/buildings that are paying that office to manage the property on thier behalf. The bank will lend against a rent roll, but a bank will not lend against goodwill! Goodwill can be sales goodwill and more often than not a good performing sales business with a proven track record will have sales goodwill.
Should you pay for Goodwill? Yes, you should. But it is important to ask all the right questions. If the office and rent roll were to be valued independentl
y, then more often than not a separate amount for goodwill will be established. Basically, this will be calculated based on average sales peformance for the last 3 years, and then a percentage of the sales income will be applied as a value. For instance, between 10% - 20%.
If I'm happy to pay for Goodwill, what am I getting? If you decide you're happy to pay for goodwill, then make sure
1. Does the Principal account for 60% or more of the total sales in the office. If they do, then are they staying on post-sale and if so for how long?
2. Are the sales team staying and not going anywhere post-sale? Maintain or better the current commissions split structure.
3. Do you know what you're doing with running a sales team? You will have your work cut out with the rent roll alone.
Is Goodwill different to paying for Fixtures & Fittings, Plant & Equipment? Technically yes it is. These amounts never should be large amounts unless the office and rent roll you are acquiring has a very new, expensive and swanky office fitout, which otherwise would've cost you a lot more to pay for yourself starting from scratch. If you've been asked to pay an amount for the database then ask the question what's in th
e database. More often than not the same names are in the 10 other competitor offices' databases in the same suburb.
How to make an offer for Goodwill and not offend the vendor. I often say to people that if the vendor is so fixated on the goodwill component, then reduce your multiplier you're willing to pay, for instance $0.10 - $0.30 in the $1 and offer an amount on top for goodwill. All the value is in the rent roll, but if a principal has had the business for 30 years, there's a lot of goodwill attached to that office in the eyes of the principal and all it would take is a simple gesture to appease them.
Should you change the brand to your brand when you've paid for Goodwill? This is an intersting question, and you can argue that if you've paid an amount of money for sales goodwill and the sales team is staying and not going anywhere, then it shouldn't matter what the brand is. But do not disrespect the fact an outgoing principal with 30 years of goodwill and a household name in real estate in that suburb for a very long time, that changing the brand name could have devastating consequences for the future.
In conclusion, the local restaurant was one of the best restaurants in the area, and as I watch the new owners change the brand to their brand I scratch my head thinking why did they do that. They would've paid a lot of money for that restaurant to then spend more money changing it, and the owner is no longer there. Only time will tell whether it pays off for them.