What is goodwill?
When you buy or sell a company, you will most likely encounter the term ‘goodwill’. Goodwill is the part of a company’s value that is hard to put into figures: for instance, you may have a loyal customer base, and motivated staff. Goodwill is invisible, but it helps to determine a good sales price.
Examples of goodwill
Is your bakery worth more than other bakeries, because it has a good name in the area, or a unique bread recipe? Unfortunately not. Your company value will only increase if your bakery’s profits are permanently higher because of your unique bread. The value of a business can also be higher because it has a strong brand, or a patent. There are two types of goodwill:
- company goodwill: goodwill that your company gets, for instance for producing a unique type of bread, or for making extra profit (on a permanent basis) because of your motivated staff.
- personal goodwill is goodwill for the owner of the company. For instance, a pedicure who uses a special, personal technique, or a hairdresser who can make any hairdo unique.
How do you calculate goodwill?
Only company goodwill influences the sales price of your company. A good company reputation, its products, possibly patents and special recipes; these are all company goodwill elements. If your successor wants to produce the same unique bread, they will have to pay for the recipe. Personal goodwill does not affect the price; after all, you are leaving the company and taking your special skills with you. Get an expert to calculate your goodwill for you, for instance an accountant or financial advisor. They have the necessary experience and expertise.
If you and the potential buyer cannot agree on the goodwill value, you can choose for an earn-out construction. That way, you agree that:
- the buyer pays part of the goodwill sum directly upon transfer of the company;
- after a period you have both agreed on, the company results are measured;
- if the company still makes extra profit because of the motivated staff or unique bread recipe, the buyer pays the rest of the goodwill sum.
Goodwill and the Dutch Tax Administration
If your successor pays an amount for goodwill, the Dutch Tax Administration will view this amount as part of the discontinuation profit. You have to pay taxes over this profit. The buyer can deduct the goodwill from the gross company profit, keeping it low.
Ask an expert or your sector organisation for advice.