A pragmatic and up-to-date approach for business leaders who want to understand the real profitability of their invested capital and calmly prepare a business transfer or sale. Auteur : Jean-Marie Longin – Founder of Bazanne
The goodwill (surplus value) is one of the most powerful — and most misunderstood — concepts in business valuation. For an SME leader, it is a key strategic indicator: it measures the company’s ability to generate a return superior to that of a risk-free investment, thanks to its intangible assets and unique positioning.
At Bazanne, we regularly use this analysis to help our clients and prospects better manage their performance, negotiate a sale under better conditions, or prepare a fundraising round.
What is Economic Goodwill?
Economic goodwill represents the excess profitability generated by your company compared to what the same capital would produce if invested in a “risk-free” placement (government bonds or equivalent). than the simple sum of its net tangible assets. more than the simple sum of its net tangible assets.
The Recommended Method: The Excess Earnings MethodThe most robust and widely used method for SMEs is the Excess Earnings Method. (Excess Earnings Method).
It breaks down into four key steps: Determine the normalized result We generally use normalized EBITDA or recurring EBIT,after adjusting for exceptional items. Calculate the normal remuneration of invested capital Shareholders’ equity × Weighted Average Cost of Capital (WACC), typically between 8% and 12% for an SME depending on its risk profile and sector. Isolate the annual excess profitability Normalized result – Normal remuneration of capital = Excess profitability. Capitalize this excess Apply a multiple (generally between 3 and 6 years) based on the sustainability of the company’s competitive advantages.
Concrete Example An industrial SME generates €6 million in revenue with a normalized EBITDA of €900k and shareholders’ equity of €2.2 million. - Cost of capital applied: 9% - Normal remuneration of capital: €2.2m × 9% = €198k - Excess profitability: €900k – €198k = €702k - Capitalization over 4 years (average for this sector): €702k × 4 = €2.808 million
How to Increase the Goodwill of Your SME Goodwill is not a fixed figure. It can be actively developed through several strategic levers: - Strengthening market positioning and differentiation - Developing recurring revenue streams (multi-year contracts, subscriptions, maintenance) - Protecting and enhancing intangible assets (brand, data, processes, patents) - Professionalizing the organization and governance - Reducing the risk perceived by a buyer or investor
These actions have a direct impact on the sale value and the company’s ability to attract investors or partners.
Conclusion Understanding and managing your goodwill allows an SME leader to move from a purely accounting view to a true economic and strategic vision of their company. It is a valuable tool for steering performance, calmly preparing a business transfer, negotiating a fair sale price, or structuring a fundraising round. At Bazanne, we support business leaders with a precise analysis of their goodwill and the implementation of concrete actions to develop it sustainably. Would you like to assess the real goodwill of your company and identify the actions needed to maximize its value?
Contact us for a confidential discussion.
+33 6 20 86 70 64 Jean-Marie Longin Founder – Bazanne
