How is goodwill valued in a rent roll sale?

Does the way people feel about your rent roll contribute to its value? Find out the answer, and how you can improve goodwill towards your agency.

When preparing to buy or sell a rent roll, the number of clients in the database, the value they bring and the length of time they have been with the business all come into play. These are all tangible and can be measured.

What cannot be measured, however, is your business goodwill. This comes into play during a valuation or sale and can have a strong influence on final value, even though it is difficult to measure.

Take a look at a breakdown of the ins and outs of business goodwill.

What is Business Goodwill?

Business goodwill is not something tangible. It represents the portion of your business value that cannot be attributed to assets such as your client database or office equipment.

In a way, your business goodwill is the way your tangible assets (including your people) work together to influence income.

According to valueadder.com, two types of business goodwill are considered in a small business valuation. These include:

  • Institutional goodwill, which is associated with the business, its position in the marketplace and its ability to serve its customers

  • Professional practice goodwill, which relates to the skill and reputation of individual practitioners (real estate agents in our case) and the track record plus operating procedures which relate to the business itself.

You can attempt to track business goodwill prior to selling a rent roll, however, the final sales price will indicate what the goodwill of your business is truly worth.

Indicators of goodwill

The factors which come under the goodwill umbrella include brand loyalty and customer recognition. A strong market share or market dominance will also be considered.

For real estate businesses, often consistency amongst the leadership and senior sales team will provide an indicator of goodwill. There should ideally be a mix of old and new faces and a strong team rather than a single player being the ‘face’ of the agency.

Being recognised and known in the community may also be an indicator of goodwill for a real estate business. A smooth and effective set of systems and operating procedures is another factor as it makes life easier for staff and therefore improves retention.  

Tracking goodwill

While goodwill is not tangible, it will be something your accountant can help you keep track of. Keeping an eye on online reviews and understanding your NPS (Net Promoter Score) can indicate what level of goodwill there is towards your business.

Customer satisfaction surveys, brand recognition and keeping track of the number of word of mouth referrals your business receives can help to track goodwill.

Calculating goodwill

When it comes time to buy or sell a rent roll, goodwill comes into play in the final price.

Simply put, the goodwill value of a business is the final purchase price, minus the fiscal value of its tangible assets.

For example, XYZ Agency’s Rent Roll may be professionally valued at $1.6 million. However, negotiations may result in the final sales price being $1.8 million. In this case, the goodwill value, based on the business’s reputation and level of customer loyalty is around $200,000.

In some cases, a lack of business goodwill may mean the final sale price is less than the value of the existing tangible assets.

Goodwill is not simple to calculate and can be a point to negotiate over. To ensure your rent roll sale is a success, ideally you should work closely with your accountant to keep track of goodwill in your annual reporting and forecasting. Gather customer feedback and track how business comes to you as part of your business practice and encourage happy clients to leave positive reviews for you on platforms like Google, LinkedIn and RateMyAgent.

Your business reputation is so important when it comes time to sell your rent roll. Encouraging a strong workplace culture which leads to staff and client satisfaction will stand you in good stead when it comes time to value your business based on goodwill.