Your Business May Have Goodwill, But Does It Have Goodwill Value?
By: Jeffrey D. Jones, ASA, CBA, CBI
The goodwill of a business is most simply defined as the difference between the total value of the business as an ongoing concern and the total value of the business's tangible assets. The difference arises because the earnings of a business depend not only upon its tangible assets, but also upon intangible assets. When the factors that make up intangible value are transferable to a third party purchasing the business, the free market gives these intangible factors a value, resulting in an increased purchase price. The amount of that increase is generally known as goodwill.
There is a distinction between goodwill and goodwill value. “Goodwill” is defined as an intangible asset arising as a result of elements such as name, reputation, customer loyalty, location, products, trained employees, established suppliers, and related factors not separately identified and quantified. “Goodwill value” is that amount in excess of the tangible asset value which results from earnings derived from the intangible assets. A business with no earnings or earnings insufficient to support a value greater than the value of the tangible assets employed in a business may have elements of goodwill, but have no goodwill value.
Some people confuse Goodwill Value with “Blue Sky Value”. As the term “Blue Sky Value” infers, it’s the part of the Seller’s asking price that exceeds the value of the tangible assets, yet unsupported by the earnings. This portion of the price is plucked out of the blue sky and is frequently based on the unrealistic expectations of the business owner. Just because a business has been around for 15 to 20 years and has a lot of the elements of goodwill, does not mean the business has any goodwill value.
On the other hand, if a business does has a historical track record of earnings that pays all the operating expenses, provides a reasonable salary for the owner, plus a reasonable return on the investment, then the business will have goodwill value and buyers should expect to pay for it. An experienced independent business appraiser will know how to apply the appropriate appraisal methodologies for a subject business to determine its goodwill value. An excellent source for finding experienced business appraisals in your area is at the website www.appraisers.org.
Jeff is President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. 10500 Northwest Frwy., Suite 200, Houston, TX 77092 713-680-3290, [email protected]