Blue Sky

I once asked my son when he was younger if he knew what Goodwill was, and he said “It’s that place where we take old clothes each year”. Kids!

Blue sky is often used to describe Goodwill. I actually can’t stand this term when used to describe the Goodwill value in a business. Blue sky sounds like, thin air. Bankers don’t like to finance blue sky, and with a name like that who would. The SBA is about to impose a limit on the amount of goodwill they will finance in a business, which will be a detriment to small businesses. This misnomer of Blue Sky gives Goodwill a bad rap, which then influences fiscal policies. Often people think goodwill is “thin air”. Nothing could be further from the truth.

Why is Blue Sky or Goodwill important? Businesses are comprised of basically two things, hard assets and goodwill. You can take a count of hard assets like machinery and inventory, but a business is worth much more than the sum of the hard assets.

Here are some examples of goodwill. Tell me if you think this is just thin air.

Brand names like Coke where millions are spent every day to promote the brand.

Trained employees, a company’s most valuable asset is never on a balance sheet.

Product development costs, if not spent there would be no product to sell.

Loyal customers take a lot of time and money to create

Product image, like Cadillac or Chevy. Cadillac spends a lot to promote the image.

Customer contracts and purchase orders that ensure future business.

Trademarks, patents, copyrights, licensing agreements

A great location

Special technology

Convinced? Doesn’t sound like blue sky to me. Sounds like value. I believe that the name Blue Sky has been detrimental to what goodwill is really about. That bad rap is about to influence less informed political policy makers in Washington into making a decision that will hurt small businesses for years to come. Remember, small businesses drive our economy and create jobs. With punitive tax structures, without the proper capital policies and with strangling SBA financing rules, those job creating businesses will cease to exist.