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 physical assets, such as buildings, machinery or inventory. Goodwill is the essence of the company's value to its customers, clients, and employees – its good name, if you will – and, as such, is a critical asset to any buyer. It is easier, as many people intending to purchase a business will tell you, to maintain goodwill than to establish it, because, 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
- General reputation
- Future sales projection
- Going-concern element
Goodwill is a salable 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 high quality products or services
- 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
- Maintaining appropriate business location and facilities
How Is Goodwill Evaluated?
There is no set price for goodwill, though it definitely features in sales negotiations. Generally, goodwill is reflected in the amount paid that exceeds the total value of the Company’s tangible assets. The value can be reflected in the ability of the established business to earn a higher rate of return on an assembled collection of assets than would be expected if those assets had to be acquired separately – the synergies of the assets of the business. In well-established businesses, goodwill may result in a sales price much higher than the value of the company’s physical assets alone.
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. If you are considering the purchase or sale of a business, and need guidance on the value of the business’s intangible assets, or assistance negotiating the purchase and sale agreement and related transaction documents, please contact an expert business attorney at Schneiders & Associates, L.L.P.