What are the elements that make up the goodwill?
What is the pledge of goodwill?
How is the sale of a goodwill going?
What is the main method of evaluating a goodwill?
According to case law, goodwill simply corresponds to all tangible (goods, equipment, etc.) and intangible (clientele, staff skills, leasehold rights, trade name, etc.) elements assigned to the carrying on a commercial or industrial activity. They are often inseparable, and constitute their value.
Elements composing the goodwill
Goodwill is made up of tangible and intangible elements.
Tangible assets: The tangible assets of a business include everything that is concrete, visible, and real. For example: the walls, equipment, furniture, etc.
Intangible assets: Intangible assets are impossible to quantify physically. For example: the brand name, the existing customer base, the commercial lease, the sign displayed on the building or premises…
Pledging a business: Pledging a business is considered an effective guarantee for a creditor when granting credit to a business owner. Furthermore, it is a registered contract filed with the clerk of the court for registration. Through this agreement, the owner pledges intangible assets (customer base, goodwill, name, business name, and lease rights) to the creditor. This guarantee gives the creditor a right to the asset in question in the event of non-repayment of the debt.
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This pledge can be put in place by court decision, when the situation of the debtor presents risks or when the credit requested is not directly associated with a precisely indicated investment.
How is the sale of a goodwill going?
It is necessary to know in detail what the goodwill includes (tangible and intangible elements) to successfully buy or sell it. It is important to be accompanied by a professional such as a notary to draw up authentic documents and facilitate registration with the tax services and also speed up the procedures for the sale.
Main method for valuing a business: There are many methods for valuing a business. The most commonly used method in practice is the professional valuation scale method, which is based on the turnover generated by the seller. The seller must provide the buyer with access to the accounting documents for the last three years. This information allows the buyer to know what to expect in terms of turnover when taking over the business.
The method of professional scales consists of evaluating the goodwill by applying a percentage to the turnover generated by the transferor, depending on the nature of the activity. There is no official scale, but some professionals apply their own scales.
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However, the determination of the value of a goodwill must necessarily take into account other more qualitative criteria such as:
Materials, tools and goods: It is important to check the quality of the materials and equipment you wish to acquire as well as the speed of stock turnover.
Neighborhood and Environment: When negotiating the price of a business, it's important to consider the location of the premises. You should also check the facilities of competitors and how well the area is served by public transportation, as well as any planned road and urban development projects. For more precise information, it's best to seek assistance from the local town hall.
Customer management: It is good to know how the former seller managed their business and their relationship with their customers in order to be able to restore their confidence when taking over the business, and to maintain the loyalty that already exists.
Once the parties have agreed on a price, it is recommended to sign a memorandum of understanding or a promise to transfer the business before the final signature of the business. However, the signing of a protocol or a promise is not mandatory and the signatory parties can proceed directly to the signing of the contract.
It is recommended to be accompanied by an accountant to help you analyze the accounts before finalizing the purchase.
Sale of goodwill: should the employees be taken back?
The transfer of a goodwill allows the buyer to choose the elements he wants to take over. However, he will be obliged to keep certain contracts which are automatically transferred with the redeemed fund:
- The commercial lease
- Insurance contracts (the purchaser can terminate them)
- publishing contracts
- Employment contracts (under the conditions provided)
- Regarding employment contracts, the buyer of the business must take over all the employees.
To avoid having to take over the employees, the buyer must purchase the right to the lease without the business and carry out an activity separate from that of the seller.