What is Business Goodwill?

An experienced business broker Orange County will tell you that 50% of the business purchase price is attributed to goodwill. But what exactly does goodwill mean and what is it made up of?

Goodwill is far more than the value of the individual parts. Goodwill usually represents the value of the business which is above and beyond the actual worth of separately identifiable tangible business assets. It is intangible.

What factors contribute to goodwill?
Business goodwill is typically the synergy among the various assets in a well-run business which are used to generate revenue. Even though it is hard to determine the value of goodwill, goodwill makes a company more valuable and even easier to sell. All in all, because the components that make up goodwill have subjective values, it is very easy to under- or over-value goodwill in a business valuation. It is good to work with experienced business brokers Orange County in order to closely evaluate goodwill. Buyers should also be wary of business owners who overvalue goodwill simply to command a higher selling price.

What assets makeup goodwill?
Goodwill cannot be ignored in a business valuation. When calculating the goodwill, it is imperative that you consider the factors that affect goodwill. These intangible assets can be categorized as follows:

  • Solid customer base and supplier lists
  • Company brand name and recognition
  • Good employee relations
  • Licenses and permits
  • Trademarks, copyrights and patents
  • Domain name and company website
  • Expectation of the future economic benefits
  • Proprietary technology
  • Reputation among vendors and customers
  • Training and processing systems
  • Trade secrets
  • Executive and managerial talent & innovation

How goodwill is established?
Although goodwill is intangible, it still needs to be calculated. It is important to assess goodwill accurately so as to avoid overpaying on a business purchase or selling a business for less than it is worth. Business goodwill will only be recorded if it is acquired as part of the purchase of a business. Accountants handle goodwill by subtracting fair market value of tangible business assets from the total business value.

The goodwill of a company is never amortized (paid off, reduced). The management of a business is what determines the value of goodwill each year. Goodwill value can be reduced by recording impairment when the fair market value goes below the historical cost. You should note that businesses cannot have negative goodwill. The goodwill can, however, be equal to zero.

A business valuation is a must when selling a business. You should never forget to account for your business’ goodwill. Working with an experienced business broker Orange County will give you an upper hand in any business valuation.

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