Goodwill is considered an intangible within the business.
Effectively, it is the “markup” on the physical assets of the business which helps to create the ultimate valuation of the business.
An example of goodwill is:
There are two "types" of goodwill:
This is the difference between the actual value of the business and the purchased value of the business
The best way to think about this is as internally generated goodwill. That is, it comes from the age, location, and overall reputation of the business. Sometimes, a business can have negative goodwill when the value of the business is less than its assets.
Essentially valuing goodwill comes from two methods:
No matter the method, we recommend getting a professional valuation to give you an alternative of the value for your business.
Below we compare two type of businesses and outline their goodwill and goodwill as a percentage of the business value.
Capital light businesses (such as software companies and service businesses) will always have a higher proportion of goodwill when compared to businesses that are asset heavy such as trucking businesses or machinery businesses.
In most cases the, a buyer will consider what is the “reproduction value of the assets” when they look at buying the business. For example, if you are selling a trucking business with the value of all the trucks at $10 million and you are asking $25 million for them, (meaning your goodwill is relatively high at $15 million) a buyer may elect to simply go out and purchase all the trucks and setup in competition.
Businesses with high assets (such as plant hire companies, trucks, etc) typically have a lower goodwill value then a service based business.
The key drivers of goodwill are varied, but essentially, a buyer will want to see what future maintainable profit is being delivered from the assets of the business, both tangible and intangible.
The most notable items are:
The quality of goodwill can be pivotal in determining how risky your business is to buy. For example:
There are a lot of moving parts when it comes to valuing goodwill. While some goodwill items are easy to find, you'll quickly discover that you're just chipping away at the tip of the iceberg. At Nash Advisory, we can help you:
Get in touch with Nash Advisory to discuss how to go about valuing goodwill. We'll even provide you a free business valuation with $5,000.