Millions of businesses are offered for sale every year. Some of these should never have been started, and others have outlived their usefulness. Many depend entirely on the present owner, and have no transferable value. Many others will only provide a minimal wage for the owner’s time and efforts.

The selling price of a business is usually based on the replacement value of the tangible assets plus something extra for GOODWILL. There is seldom much disagreement over the value of the tangible assets such as furniture, fixtures, machinery, equipment and inventory. The disagreements occur with the arbitrary value placed on GOODWILL.

BUYERS look at a business for its ability to generate enough profits to meet expenses, to make a fair return on the capital invested, and to pay a reasonable wage to the owner for work performed.               If a business doesn’t meet these requirements then that business has no goodwill. It is not worth much more than the replacement value of its tangible assets. In fact most buyers will not want to buy the assets – even at bargain prices- if the business is not sufficiently profitable. They would rather leave their money in the bank until a more profitable business is located.

SELLERS of course see the situation differently. They have invested much blood, sweat and tears into the business. They wish to recover their entire capital investment and also want to be compensated for their time and effort spent. They desperately try to sell the POTENTIAL of the business. This is not being realistic. If their efforts had been successful the results would have been reflected in the profits of the business. A business will not sell if a buyer is expected to repay the seller for his past mistakes and all the things he didn’t do to make the business profitable.

A person will purchase an unprofitable business is because he recognizes the POTENTIAL – but it is the buyer who brings POTENTIAL to the bargaining table, not the seller. Every buyer thinks he can do much better than the previous owner. He has great hopes and expectations for the future of the business.       If he achieves his goals it will be as a result of his efforts. He may buy the business because he sees the potential – but he will not pay the seller for what he hopes to do.

He knows that if he fails to achieve his dream, and has to close it down he will only be able to salvage the liquidation value of the tangible assets. He will not be willing to pay much more than this when he takes over an unprofitable business.

Unless a business has a proven record of profitable earnings it is not worth any more than the replacement value of its tangible assets.  

There  is  no  Goodwill  in  an  unprofitable  business