Is goodwill worth anything – especially in times like these?
Warren Buffett, Chairman of Berkshire Hathaway, describes
how he was brought
up to believe the only real assets were tangible assets, and that did not
include goodwill, but later he changed his mind.
His experience of inflationary times taught him that fixed
assets do not keep their value, but goodwill was always worth something.
Of course, a cynic might point out that the same Warren
Buffett has just suffered a huge decline in his nominal wealth, following a
fall in the price of his shares in Berkshire Hathaway.
However that in turn begs the question as to what extent the
nominal value of shares reflects the true value of a business – again,
especially in times like these?
Buffett is certainly right that a business has no more
valuable asset than a reliable customer.
The difficulty is in putting a cash value on how reliable
that customer is.
Once you have a customer, you must make every effort to keep
him – it is amazing how negligent some businesses are in that respect – but
there are no guarantees, no matter how hard you try.
Even if you retain customers’ goodwill, there is no altering
the fact that in a recession many customers will have less to spend and some
will disappear altogether.
That uncertainty has to be reflected in a company’s nominal
value, but the goodwill of a reliable customer is still an asset that should be
guarded and maintained as carefully as any item of plant and machinery –
especially in times like these.