What is Goodwill?

Goodwill is an intangible asset – that is, not a physical asset. Goodwill is normally best represented as the portion of a business sales price not attributable to the value of physical assets acquired. Most simply:

Goodwill = Business Sale Price – Value of Physical Assets

Why do acquirers pay for goodwill?

Business acquirers pay for goodwill where the business presents a demonstrable benefit to the owners of the business which is significantly greater than the benefit derived from simply owning physical assets.

Generally, this benefit can be seen in the form of a strong brand presence, long term customer relationships and loyalty and a range of other positive factors.

Is there such thing as negative goodwill?

Yes. Occasionally businesses are sold for less than the marketable value of their physical assets. This generally happens to businesses that may be distressed, or businesses that hold a high physical asset base, but have a history of producing low returns to owners.

Valuing goodwill

There are various methods suggesting appropriate ways to value goodwill on a standalone basis. Typically however, the simplest approach is to analyse the business as a whole, considering all positive and negative features of the business, in conjunction with risk factors that may pose threats to the future performance of the business. From here a determination can be made of the business’ value as a whole, with goodwill then making up a portion of this value and physical assets the remainder of the value.

Find Out More

Quinn M&A’s expert business and company valuation team can assist you with better understanding goodwill and how it relates to your business. Contact Quinn M&A on +612 9223 9166 or submit an Express Enquiry to meet with one of our Directors.