Why Goodwill Is Important to Your Business
Goodwill can enhance the value of your business, but what does the term mean when buying or selling a business?
Usually, the term “goodwill” is a reference to all the effort that a seller puts into a business over the years that he or she operates that business. In a sense, goodwill is the difference between an array of intangible, but important, assets and the total purchase price of the business. Don’t underestimate the value of goodwill in the long-term and short-term success of any given business.
Goodwill is defined by Investopedia as an intangible asset associated with the purchase of one company by another. An intangible asset can be thought of as asset that is carried on the balance sheet, and it may include a company’s reputation or a recognized name in the market, according to the M&A Dictionary. If a company is purchased for more than its book value, then the odds are excellent that goodwill has played a role.
Goodwill most definitely contrasts and should not be confused with “going concern value.” Going concern value is usually defined as the fact that a business will continue to operate in a fashion that is consistent with its original intended purpose instead of failing and closing down.
Examples of goodwill vary. Some of the more common and interesting examples:
- A strong reputation
- Name recognition
- A good location
- Proprietary designs
- Trade secrets
- Specialized know-how
- Existing contracts
- Skilled employees
- Customized advertising materials
- Technologically advanced equipment
- Custom-built factory
- Specialized tooling
- A loyal customer base
- Mailing list
- Supplier list
- Royalty agreements
In short, goodwill in the business realm isn’t easily defined. For example, standards require that an outside expert annually value companies which have intangible assets, including goodwill. A business owner simply can’t claim anything under the sun as an intangible asset.
Understanding what is a real and valuable intangible asset or example of goodwill can be a key factor in the buying and selling process. Whether you are buying or selling a business, you should leverage the know how of seasoned experts. An experienced business broker will be familiar with goodwill and how to properly evaluate the worth of it in setting a valuation for your business. A business broker guide you in both understanding and presenting goodwill variables, as well as steer you though the buying and selling process.
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