Personal Goodwill versus Business Goodwill

Buying a business is considerably less risky than establishing one, however it can have its downside as well if your legal team do not ensure that the T&C’s of the sale are watertight.

One area of concern is often the strength of the ongoing trade and whether new ownership will have an effect on whether customers still wish to use the business being bought.

This seemily is what happened to the owners of Patisserie UK the makers of macaroon bars in Scotland. They were bought by Lees Foods, however their major customer Costa Coffee who represented 75% of their turnover decided to end the agreement only three weeks after completion.

The loss of three quarters of the turnover has of course lead to the business losing all of its value and the sellers are now being sued under the warranties contained in the sales agreement. I assume that the buyers are suggesting that the sellers knew or should have known that this contract was not going to be renewed and failed to disclose the fact.

Perhaps though Costa Coffee did not like the change in management?

This can often happen with the smaller business, and a buyer should make enquries as to whether the profits of the business is as a result of the personal goodwill of the owner. I.e When John and Linda sell their business their customers simply decide to use another supplier as they only used that business because John and Linda ran it.

When planning their exit stategy, the seller of a business should try to ensure that their business is not based around personal goodwill.

The business may have been obtained via networking and personal recommendation however it is part of the planning process in selling your business to ensure that you then withdraw from the ongoing business of maintaining that customer. That XYZ Ltd, customers obtained from a breakfast meeting referral, are used to dealing with Fred in the sales department rather than John and Linda.

Only then does personal goodwill become your businesses goodwill and a buyer can be sure that you have something to sell, and they have something of value they can buy.

This entry was posted on 10/03/2009 at 10:19 am and is filed under Selling Your Business, Buyers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.