Goodwill is an asset that is an intangible part of a business being purchased. In spite of its intangibility, goodwill may be worth more than concrete assets, such as property, buildings, machinery or inventory. Goodwill is the essence of the company's value to its customers, clients, and employees and, as such, is invaluable to any buyer. It is easier, as many people intending to purchase a business will tell you, to maintain goodwill than to establish it, since, among other things, goodwill takes time to build. Purchasing a business that already has established goodwill in the community can give the new owner a strong competitive edge.
What Intangible Assets Compose Goodwill?
Prospective buyers and sellers should be aware of the various aspects of goodwill. Not all will apply to every business, but aspects of goodwill include:
- Brand name
- Solid customer base
- Good customer relations
- Good employee relations
- Patents or proprietary technology
- General reputation
- Future sales projection
Goodwill is a saleable asset, presumed to generate sales revenue and customer continuity. Having been established over years of honest and efficient behavior by the previous owner, it is transferable to the buyer, assuming the buyer maintains the pre-established excellent business practices.
How Is Goodwill Established?
As mentioned, goodwill can only be established over a period of years during which it is nourished and maintained. In business, it is assumed that expenditures have been involved in creating and preserving goodwill. Steps taken to do this include:
- Healthy and continuous investment in promotion
- Maintenance of necessary quantity of high quality customer supplies
- Support of excellent relationships with both customers and suppliers
- Maintenance of efficient and respectful management and employees relationships
- Establishment and maintenance of corporate identity and image
- Keeping up an appropriate location
How Is Goodwill Evaluated?
There is no set price for goodwill, though it very definitely features in sales negotiations. Generally speaking, goodwill is reflected in the amount in excess of the firm's total value of assets and liabilities. In well-established businesses, goodwill may be reflected in a price several times higher than the firm's physical assets alone would be reasonably worth.
There are several complex methods by which business goodwill can be calculated so it is essential to have a highly competent business attorney involved in the negotiation process.