If you’re new to the concept of business valuations or looking to learn more about the topic, you may quickly find that determining the real value of a business isn’t an easy task. Your company’s assets and liabilities can help you determine a baseline value, but there’s so much more that goes into a business than the physical assets. Goodwill accounts for all the intangible value of a business. Knowing what it is and how to calculate can assist business owners to determine the real and future value of their business. This blog provides a brief overview of goodwill and its impact on your company’s value.
What Is Goodwill?
Goodwill is the collection of a company’s intangible assets. You can’t physically see goodwill and its not quantifiable. You may be asking yourself, what good is it then? What could be the use in knowing the worth of something that can’t be measured?
The intangible assets that make up goodwill are extremely valuable to your company. They are what makes your company unique. Some of the assets your company may excel in include:
- Brand
- Reputation
- Customer Relationship
- Intellectual Property
- Proprietary Technology
- Labor Skill
- Employee Relations
Although these assets can’t be measured traditionally, by the revenue they bring in, they greatly affect a company’s financial well-being. Companies with a good reputation receive more business than a company with a poor reputation. A company with a very skilled labor force can create more products with better quality than a company with an unskilled labor force.
The assets and valuation of goodwill are subjective to each individual company. It’s not always apparent what intangible assets are valuable to your company. Usually it takes a third party interested in buying the company to pinpoint its worth. For example, Facebook once purchased Farm Bureau’s URL, fb.com, for $8.5 million. Although the website didn’t provide any additional income, Facebook’s valuation of the Farm Bureau’s URL was based on Facebook’s desire to use the tool themselves.
How Do You Calculate It?
There are many ways to calculate goodwill. The most agreed upon way to calculate a company’s goodwill is during a merger or acquisition. This is because it is the only time goodwill appears on a balance sheet. It can be calculated by finding the difference between a company’s purchase price and its book value. Book value is the company’s assets minus its liabilities. It should look like this:
Goodwill = Purchase price – (Assets – Liabilities)
For example, if Company A is bought for $40 million and has a book value of $32 million, the company’s goodwill is worth $8 million.
In other circumstances, the methods of calculating goodwill are subjective to the individual companies and accountants. Some argue valuations can only be determined by a third party while others think valuations can be useful from both internal and external parties.
Now What?
Valuations can become complicated quickly. Councilor, Buchanan & Michell has a number of certified business valuation professionals (CVAs) that can assist you with the valuation process and walk you through the procedures.
Please contact Tom Bailey via our online contact form for more information.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
