What Is Goodwill When Buying Or Selling A Business?

What Is Goodwill When Buying Or Selling A Business?

What is goodwill?

Goodwill is the intangible value of a business such as its reputation, branding, and customer loyalty, and other value that makes the business. It is what makes the purchase price of business higher than just the fair market value of all its assets less liabilities.

Although goodwill is listed as an intangible asset on a balance sheet, it cannot be bought or sold separately from the business. Without the business, the goodwill does not exist.

Read: ATO definition of intangibles

What affects the value of the business’ goodwill?

Although, not an exhaustive list, here are some things that can affect the value of the business’ goodwill:

  • Customer relations
  • Customer loyalty
  • Staff satisfaction
  • Branding
  • Business’ reputation
  • Business’ location

Intangible assets which can be sold and purchased separately such as patents, licences and trademarks are not considered as goodwill.

Why is goodwill important when buying or selling a business?

It’s important to understand goodwill as it often comes into play when buying or selling a business. The value of the business’ goodwill is generally be included in the sale price.

How to calculate the goodwill of a business?

If a business has an asking price of $200,000, has assets of $100,000 and liabilities of $50,000.
Use this formula to work out the value of goodwill in a business:
Goodwill = Price – (Assets + Liabilities)
Goodwill = $200,000 – ($100,000 + $50,000)
In this case, the goodwill is valued at $50,000

Try our easy to use goodwill calculator.

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