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When Brand Value Isn’t Value

“I am not happy about your valuation, Jim. You seem to have ignored our brand value. My customers love us, and we get lots of great feedback on the story about us in Southern Living. All that goodwill has to count for something.”

Roger (not his real name) has owned his business for 15 years, after spending the first part of his career at a prominent Nashville architectural firm. He told me he went into business for himself because he loved helping homeowners solve their interior design needs. Roger also said he liked the business model of interior design. He gets a design consult fee and a fee when the homeowner buys the furniture and fixtures he recommends. “I have loved working for myself, and being so involved with my clients, many of them have become friends,” he said.

But now ready to retire, Roger is coming to grips with the reality he hasn’t built a business with transferable value. There are two fundamental flaws that render his business unsellable. First, even before COVID, retail economics are generally terrible, and that is the case in Roger’s situation. To be accessible to his clientele, Roger needs a prominent location in an expensive area of town. So his rent is very high. He needs to keep the store open long hours, so his personnel costs are high. And, he needs to keep the store stocked with inventory, so his cash flow is always tied up in stuff waiting to be sold. Even in a strong economy, these common realities make it difficult to sustain, much less make really good money with storefront retail.

The second fundamental problem is Roger. Don’t get me wrong, Roger is a great guy and loved by his clients. But Roger is central to the store’s success. Even though the business does not carry his name, it’s hard for anyone to think the business is sustainable without him.

These factors led me to tell Roger his business value didn’t extend much beyond his inventory asset value. He was obviously disappointed, and that’s when he asked me about brand value. “Doesn’t the goodwill I’ve built up over the years count for anything?” he asked.

I hear this a lot,” I told Roger, “but goodwill is only valuable to the extent it drives economic value. Strong economics is a derivative of goodwill. Goodwill isn’t a separate asset.”

In accounting parlance, a business has asset value and goodwill value. That sounds like two separate things, but when it comes to selling a business, they aren’t separate. Goodwill is the result of a business that drives cash flow that makes the business worth more than asset value. Simply said, business value is about the sustainability of future cash flow. Period.

Roger will probably keep the store open another couple of years. While he wants to retire and start traveling more with his wife, he doesn’t have to leave the business anytime soon. I hope he understood my non-accountant explanation of how accounting terminology and business transition terminology mean different things. This goodwill-brand misunderstanding is a common problem, causing many owners to overestimate the value of their business. Waiting to learn this until they need to sell is not a good thing.


JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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