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What is “Goodwill” and How Can I Get Some?

By John H. Nardozzi, CPA, CVA

One of the most important factors in making an oil heat or propane business more valuable is “goodwill.” While you can easily tally up the value of your delivery trucks, parts and product inventory, equipment and real estate, these assets can all be dwarfed by the importance of goodwill. Yet few dealers fully understand this elusive term.

Goodwill can be defined as the status of your company in the community. If people know your company, like your company and believe you are a good resource, it leads to customer loyalty, increased margin, and more reliable revenue stream. What goes into creating goodwill? Many factors

Goodwill is included in the classification of assets known as the “intangible assets.”  You can’t see intangible assets, or hold them in your hand.  But in the fuel delivery business the Intangibles combine to create essential value that sets a business apart from its competitors. Intangible assets include a variety of “invisible” – yet very important – items, including:

    • Goodwill
    • Operating systems
    • Customer list
    • Patterns
    • Reputation of company & people
    • Designs
    • Trademarks
    • Customer knowledge
    • Trade names
    • Licenses & permits
    • Web presence
    • Email addresses
    • Logos and slogans
    • Credit card processing information
    • Telephone numbers
    • Supply contracts
    • Marketing materials
    • Favorable credit rating
    • News items
    • Spill plan compliance
    • Location
    • Covenants not to compete
    • Stable work force
    • Franchise licenses

These intangibles are probably the largest asset that you own. The stronger your intangibles, the greater the value of your company. Intangibles are not usually on your books because you have created them over many years of running a good, reliable business.

Intangible assets play a critical role if you are selling your business or acquiring another company. Think about it:  the aging trucks, dusty parts, dilapidated bulk plant, and outdated office equipment of that company you want to buy can easily be replaced. But the intangibles of the business are want you really want.

Let’s get technical for a moment. Say you purchase a competitor and acquire his “hard” assets and intangibles. For tax purposes the intangibles are amortized (written off) over fifteen years. For book purposes, intangibles are analyzed for “impairment” and adjusted downward for decreases in value. This distinction is beneficial to a company when it is used as a deduction for taxes, but not on the books, thereby increasing the bottom line.

When seeking financing it is a good idea to obtain a valuation of your customer list before meeting with the banker. Some banks use it as part of the collateral base and lend money on a percentage of the value.

It should be clear that goodwill, along with other intangible assets, is something you want for your business – the more the better. Here are some steps you can take to build the value of your intangibles.

      • Strive to build the best margin you can
      • Grow your customer count
      • Move accounts from will-call to automatic delivery
      • Get more customers signed up on a budget
      • Get customers on service and maintenance agreements
      • Charge a profitable price for service and on service agreements
      • Increase gallons per drop
      • Use routing software to be more efficient
      • Be aggressive on accounts receivable collection
      • Clean up your fleet, yard and your office
      • Clean up your inventory by getting rid of excess inventory and junk
      • Clean up your customer list by removing inactive customers
      • Clean up your books and records
      • Invest in attractive signage on trucks, tanks and your office
      • Build an attractive and active website

At first these may seem like “little things” that should take a back seat to important operational issues. But they are critical in building goodwill for your company and increasing its value, whether you are planning to sell, obtain financing, or simply want to continue to build a valuable business for the decades ahead.

John H. Nardozzi, CPA, CVA, MST is the owner of Nardozzi, LLC (www.nardozzillc.com) which provides consulting and valuation services for oilheat and propane dealers.

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