Definition of Goodwill a Business

Goodwill: Definition and Calculation  March 14, 2012 – 06:18 pm
Goodwill is what a business

Most business owners and executives recognize that goodwill is an important concept in business valuation and the buying or selling of a business. Not as well understood is the meaning of goodwill, its calculation and tremendous importance in buy/sell negotiations, particularly for medium and small businesses.

Here is a rather common sense definition of goodwill from the CICBV:  Goodwill – that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.

While true, and conceptually easy to understand, this definition does little to practically assist a valuator or vendor.  What is the value of your name and reputation?

We prefer this definition: goodwill is the ability of the combined tangible assets of the business to earn an above normal economic return.  In other words, the whole is worth more than the sum of the parts (1+1 may equal 3).

The intrinsic value of any business can be thought of as the sum of the value of its tangible assets plus goodwill.  Intrinsic value can be calculated using various methodologies, such as by capitalizing (applying a multiple to) earnings.  Goodwill is the difference between the intrinsic value of the business and the stand-alone value of its tangible assets.

Source: Range Advisors : Blog

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