Like it sounds, goodwill is the company’s positive reputation. Business goodwill, which is an accounting term that refers to intangible assets, is more specific. A company’s brand, loyal customers, good reputation and patents are all examples of intangible assets. Although intangible assets cannot be quantified like property or sales, they are just as important in determining the business’s worth before it is sold.
Goodwill, although intangible can be measured. It is an important tool for determining a fair selling price and to avoid overpaying in a business sale. This value can be calculated by subtracting the fair value of the tangible assets from the total value of the business. However, the question of who is “overpaying” will depend on who you ask. A person who has been involved in both the buying and selling of a business may be able to argue for the irreplaceable value that is goodwill.
If the business owner bought the business, goodwill can be listed on the balance sheet. A business can be purchased at a price that is higher than its assets. Goodwill is often more valuable than the assets in a business because it can lead to higher sales. Customer loyalty can’t be quantified, but can help determine whether a business will succeed even after ownership has been transferred.
Goodwill makes up the largest part of a small-profitable business’ purchase price. It is therefore important that a buyer has a good understanding and knowledge of what goodwill is, and how it can be used to increase profitability.
The hard assets of a company, such as fixtures and equipment are not enough to determine its value. It is the intangibles that generate the income that make up the majority of the business’s value. Goodwill can be described as the difference between the present market value of tangible assets and the total business value.
What assets are goodwill?
Reputation and brand name
Solid supplier and customer lists
Good customer relations
Domain name and website
Copyrights, trademarks and patents
Permits and licenses
Excellent employee relations
Future economic benefits are to be expected
Management and executive talent, as well as innovation
Training systems and processes
We have extensive experience helping business buyers and sellers. Mission Peak Brokers help sellers and buyers navigate their unique transactions with their perspective from both sides. Our brokers are well-aware of the importance of intangible assets as well as the value of goodwill. If you require assistance, our brokers can help you calculate it.
To schedule your initial consultation, contact us. We’re here to make your dreams a reality!