By Carl Grimes, CBI-Sunbelt of the Ozarks, Lowell

Blue sky?

Good will?

Is there a difference between the two?

Yes! And if you don’t know the difference before you plan the sale of your business, you probably won’t get paid for all the hard work you’ve poured into the business.

Blue sky is just that– look up and what can you see? Only blue sky! The truth is: Blue sky can’t be measured and a savvy buyer won’t pay anything for it.

Good will, however, is a measurable asset of a business. If your business has goodwill, it will become part of the price a buyer will pay for the business. Most of us are familiar with good will as a term reflecting some prudent value beyond a company’s tangible assets, such as reputation and loyalty among clients and community.  As an intangible asset, good will is the value of the business in excess of the owner’s equity, and reflects the synergy among the other assets used to produce historical income.

An accounting of good will should be part of any certified, independent, third party business appraisal, and a top reason why every business owner should have an appraisal. Once good will has had a value assigned to it by a professional business appraiser, it becomes an asset of the business.

Basically, good will is tied to the net cash flow or earnings before interest, taxes, depreciation, amortization (EBITDA). This is also described as “cash flow” but business brokers and appraisers know that cash flow is more than EBITDA, as there are almost always other expenses that can be “added back.”  This equation reveals the seller discretionary cash flow (SDCF) sometimes called the true owner’s net (TON). This is the key number to placing a value on good will for a particular business.

In essence, SDCF/TON is the amount of money the current owner can prove is going into  the “Hip National Bank,” an idiom for the owner’s wallet.

The key word is “prove.” Good will and requires a paper trail a buyer can follow.

A professional business broker is trained to help the business owner recast income to find the SDCF or TON. Once value is established and certified to by a business appraiser, only then can the business owner have the opportunity to be paid for the asset of good will.

Carl Grimes is the founder of the CBI Team, affiliated with the Sunbelt Business Brokers Network. With over 15 year’s experience, Grimes holds the designation of Certified Business Intermediary from the International Business Brokers Association. CBI-Sunbelt of the Ozarks has offices in Arkansas and Missouri and the only full service business brokerage covering the entire Ozarks region. Email Carl at carl.grimes@cbiteam.com.