Goodwill is the value of a business to a purchaser over and above the net assets of the business in question. Ultimately, goodwill is a reflection of the intangible portions of the business, such as reputation, brand name, customer relations and employee morale as well as other factors that improve the company name.
When a business is purchased, goodwill will rarely be mentioned, but its value will be factored into the overall purchase price. Unlike the net assets of a particular business in which the value can be easily appraised, goodwill is more subjective. The value of goodwill is negotiable, and it is up to the buyer to decide what the goodwill of a particular business is worth. This is done by determining the additional value the goodwill brings to the business.
In order to place a value on the reputation of an operating business, the purchaser must consider how well the current clientele fits into the purchaser’s visions for the business. In a turnkey operation, reputation, customer relations and employee morale will weigh heavier on the goodwill scale. Conversely, in a situation where the new owner intends to make several changes in order to improve the business, the goodwill may not weigh so heavily.
Ask questions that will assist in defining the value of the goodwill. Will the business realize additional profits due to business name? Would a similar business without an established clientele be as profitable? Does the value assigned by the seller to the goodwill aspect of the sale meet your purchase requirements? These variables allow the investor to establish whether or not the goodwill value is supported.