By John H. Nardozzi, CPA, CVA
One of the most important factors in making an oilheat 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.
Intangibles Hold the Value
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:
- Customer list
- Reputation of company and people
- Trade names
- Web presence
- Logos and slogans
- Telephone numbers
- Marketing materials
- News items
- Stable workforce
- Operating systems
- Customer knowledge
- Licenses & Permits
- E-mail addresses
- Credit card processing information
- Supply contracts
- Favorable credit rating
- Spill plan compliance
- Covenants not to compete
- 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 Think about it: The aging trucks, dusty parts, dilapidated bulk plant, and outdated office equipment of that company you want to buy can easily be replaced.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 what 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 15 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