If you are thinking of buying a business or selling a business, you may be wondering what exactly is meant by the term ‘goodwill’. Essentially goodwill is the price you pay for a business, less the value of any tangible assets such as plant, equipment, furniture and fittings.
For example, let’s say you agree to buy a business for $1 million and this value includes everything needed to run the business (plant, equipment, furniture, fittings, customer base, phone numbers, websites, staff members in place etc.). Also, let us say that the plant, equipment, furniture and fittings are worth $400,000. In this case, the goodwill equals $1,000,000 less $400,000. In other words, the value of goodwill is $600,000.
Goodwill represents the intangible things you are buying. These include:
- Loyal customers you are acquiring
- Business secrets that help make the organisation successful
- Reputation associated with the business name
- Leads that are likely to come through the business phone number and website
- Experience held by the staff members
At times, a business is sold for less than the value of its tangible assets. The resulting ‘negative goodwill’ is know as a ‘discount on acquisition.