What Is Goodwill When Buying or Selling a Business?

• July 4, 2024
• Richard Willis

You may have heard of the term ‘goodwill’ before and know that people often use it to describe a feeling of support or approval. However, do you know what it means exactly in the business world? If you’re curious to find out, read on, as we’ll be discussing what goodwill really means when buying or selling a business!

Definition of Goodwill

In business, goodwill is a non-physical asset that offers long-term value and emerges when a company acquires a new business. Essentially,  goodwill represents the true worth of the business, which typically exceeds the value of individual tangible business assets.

Assets That Compose Goodwill

Goodwill can be in many forms. Let’s have a look at a few common assets that can compose goodwill and why they are so valuable:

• Strong brand recognition: Brand recognition motivates repeat purchases and leads to an increase in market share and incremental sales.
• Customer loyalty: Providing a consistent and worthwhile experience for your customers creates loyalty, which is extremely valuable.
• Talented workforce: Talented employees are a company’s greatest assets as they are major contributors to profits and can provide essential insights into the overall customer experience.
• Copyrights, trademarks & patents: The intellectual property adds to a company’s possible future worth and can be very valuable.
• Proprietary technology: Unique capabilities and tools a business developed or acquired can help gain a competitive edge.

How Goodwill Is Established & Evaluated

Goodwill can be evaluated by looking at different approaches. One approach includes looking at how much goodwill has been accumulated in the past, and another approach looks at how much goodwill will be created in the future.

Goodwill can be calculated by subtracting the fair market value of a company’s net assets from its purchase price. The goodwill calculation is an important piece of information for companies looking to buy a business because it helps them evaluate how much they are willing to pay for it.

Final Thoughts

​​Goodwill has a significant impact on value since it helps reduce the risk of deteriorating profitability of the business once it’s sold. Identifying what makes a useful intangible asset is crucial in the selling and buying process.

When you’re purchasing or selling a business, you can benefit from the expertise of experienced professionals. A competent business broker will be familiar with goodwill and how to correctly assess its value when determining the value of your company.