Goodwill Valuations

Goodwill valuations are for people buying a “going concern” or trading business as opposed to perhaps buying an empty shop to start their own business.

To the accountancy world ‘goodwill’ can be defined as a non-financial fixed asset that does not have a physical substance, but is of value to a business.

What does a business valuation include?
When businesses are bought and sold the price paid is based on their trading potential and will usually comprise several elements the most common of which are:

• value of the buildings
• value of any plant & machinery including trade fixtures, shop fittings, furniture and equipment
• the trading value of the business often called ‘goodwill’
• any transferable licences, consents, permits etc

So how is the goodwill valued?
A common misconception is that goodwill can be assessed as a multiple of annual turnover.  It is actually calculated by an experienced valuer, who analyses several years trading accounts and makes an assessment of trade to arrive at the (adjusted) net profit.  Other relevant factors taken into account in arriving at the valuation include:  business trends for the sector, staffing and wage levels, director’s drawings, customer profiles and locational factors.  Whilst future trading potential may influence a valuation, the most important factor will be the profit (or surplus) left after taking into account trading expenses and other adjustments by the valuer which are personal to the business.

How are fixtures and fittings assessed?
Fixtures and fittings are valued in use, and not based upon the new or replacement value, but on the second hand value to an incoming purchaser.  This value is arrived at either by reference to market prices or the price new depreciated by the number of years life span left until replacement is required.
Whilst fixtures, fittings and equipment usually contribute to value, the goodwill is normally the most significant part of a business’s value. 

Is stock valued too?
Consumables and stock are usually not included in a goodwill valuation, and are often subject to negotiation at the time a business is purchased.  For supermarket businesses or large nightclubs where there are regular stock takes, auditors reports will help establish the stocks value.

Ringley’s approach
Our approach is to gather information on your business by using our specifically designed questionnaires.  To assess the business income we will need sight of 3 years accounts together with any recent management accounting.  We are experienced valuers of hotels, bars, restaurants, theatres and petrol stations throughout London, the South East and the Midlands; and our valuations are accepted by all major banks and building societies.