"Goodwill" Hunting.

What is this goodwill and where can I get me some of it?

In the previous blog I talked a bit about the issue of goodwill and the hidden advantages (or disadvantages) that go along with it. In general, goodwill is a competitive advantage which cannot simply be quoted in the bill of sale the way office furniture (for example) can be. Goodwill varies from sale to sale, from industry to industry, but I would like to assert that in most cases there is nothing tangible about goodwill and that it is only transferable through one medium: employees.

Some may purchase a business for it's name. But names and logos change over time and a name may lose it's competitive advantage through market changes or if the reputation behind the name diminishes. The same applies to a customer base. Customers are fickle and many times not all that loyal. Again, this competitive advantage may not last long--especially if loyal customers hear of a change of ownership and operation.

The Carlands start to hit on what I'm getting at when they speak of a "distinctive competency" as a definition of goodwill. Let's pretend that I wanted to buy the assets of a micro-brewery in Asheville. Though I may gain the name and the customer base, that customer base will turn on me in a second if the quality of the beer falters. How do I assure that doesn't happen? Yes, I could keep the systems in tact and take great notes of the recipes, but if everything could be automated, why would every brewery need a master brewer?

Like a great chef--employees like a brewer ensure that the intagible qualities of the product meet his (and the public's) standards. Without this "distinctive competency" the entire brand would fail.

In other words, goodwill is transferable only through the people that make the business run: commitement to customer service, support, excellence, integrity--is there a dollar amount for this? This is why I support the going concern method of business purchasing for breweries. Though this may be a risky and troublesome method as far as liens and judgements are concerned, it is important to preserve as much of a successful operation (including its employees) as possible. Before embarking on a journey of entrepreneurial growth through purchasing a business --it's important not to rock the boat first!