The Problem with "Goodwill"

Is there "goodwill" when it comes to buying a business? You might be wondering what in the world I am talking about. Well, let me explain. Goodwill is defined as a sustainable competitive advantage. You might wonder how one would be able to prove that goodwill exists in a venture. Sure everyone wants to claim that they have it, but few can prove it.

The first problem with "goodwill" is being able to figure out what the competitive advantage is exactly. If you are lucky enough to find it then how do you prove it and if you can prove it then how do you measure it. You have to find some way of measuring the value of this so-called "goodwill" before a price can be applied to it.

I personally do not doubt that some companies do have "goodwill." The existence of "goodwill" many times is contingent on the entrepreneurial team rather the the venture itself. It is important that the potential buyer of the venture keeps this in mind. The question is can the "goodwill" be transferred to the new ownership?

For example, lets say a coffeehouse located in a college town is owned by a young, popular twenty something year old. There really is nothing special about this coffeehouse. It has the typical lounge feel and mediocre coffee, but it is always packed with college students. Many of the customers know the owner and really like supporting one of their peers. This owner decides that they want to put the coffeehouse up for sale. The interested party understands that there is something that this coffeehouse has that the others do not. There is obviously a competitive advantage present in this venture. The coffeehouse sells for a more expensive price due to this "goodwill" factor. The new owner takes over the coffeehouse and continues to operate it exactly as it was before. However, the customers slowly become scarce. The reason for the lack of customers is due to the fact that the new owner is middle aged and is not interested in making friends with the clientele. This is an example of the fact that even if "goodwill" exists it may not be transferable.