A business merger is when independent businesses are combined and form a new, singular identity. When the merger occurs, a new company forms based on the combination of staff, resources, and other assets. The reason for mergers is to create financial growth for both companies involved. With greater financial power, benefits are acquired, including higher market share, customer influence, and less competition; just as there is strength in numbers, larger companies are harder to compete with.
There would be no reason for firms to merge if not for some degree of value that each company would obtain. Although actual mergers (wherein both companies involved benefit mutually) are unlikely, the decision to become a merger is still valuable to each company because they each benefit. Identifying the benefits each company would obtain through the merger ultimately influences the company’s decision to go through with the business merger.
One value that supports business mergers is goodwill. There are two kinds of goodwill, personal and enterprise; both have strengths and give reason for companies to be part of business mergers. In this article, we will discuss in greater detail why valuing goodwill matters when it comes to business mergers. Read on to learn more.
Let’s Discuss Goodwill in Detail
Goodwill is an intangible company asset. Some intangible assets include business reputation, business trademarks, brand credibility and recognition, business relationships, and other business relationships. Business-related goodwill is broken down into two categories: personal and enterprise; these two types of goodwill are categorized in order to differentiate how businesses valuing goodwill are affected.
Type 1: Personal Goodwill
Personal goodwill pertains to the value of a company’s characteristics as they relate to the individual instead of the business. Personality, skill, business relationships, etc., are examples of nontransferable personal goodwill as they relate to the individual. At the same time, some types of personal goodwill are transferable through things like employee contracts and other non-compete agreements. For a company to maintain its suppliers, customers, and other business relationships, personal goodwill is needed and is, therefore, a way of valuing goodwill in business mergers, as it can be transferred, regardless of the changes in the business name and role.
Type 2: Enterprise Goodwill (Transferable)
Enterprise goodwill is a business’s goodwill, as it relates to the business rather than the individual. The company’s name, where the business is located, the business websites, etc., are some examples of enterprise goodwill. Businesses that contain more enterprise are valuing goodwill of enterprise over personal goodwill because assets transfer. Plus, the earning potential does not change, regardless of who owns the company.
Business Mergers Benefit From Personal And Enterprise Goodwill
The value of the individual and the business are both significant and, therefore, are weighted differently depending on the goals of those interested in purchasing companies and business mergers. Striking a balance between individual asset transfers and business-specific transfers is the goal of those looking to obtain a successful business merger, as valuing goodwill requires the inclusion of both types of goodwill.