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Executive Summary: Many profitable businesses are worth significantly more than their tangible assets suggest, with this "hidden premium" often representing 20-80% of total value. Understanding goodwill—the intangible factors driving this excess worth—is crucial for owners considering sales, estate planning, or strategic decisions. Learn why asset-only pricing leaves money on the table and how professional valuation can help quantify your business's true worth.
Many business owners find themselves asking a critical question: Is my business worth more than the sum of its assets? In other words, if you add up all the tangible things your company owns—equipment, inventory, real estate—could the business still sell for a higher price?
The short answer for most profitable companies is yes, and the reason lies in something called goodwill. Goodwill represents the intangible factors that make your enterprise valuable beyond just its physical assets. It encompasses the extra value a buyer is willing to pay for your business because of your reputation, customer loyalty, brand strength, and other hard-to-measure strengths.
This concept is both familiar and confusing to many business owners and even financial professionals like CPAs. Building a clear understanding of goodwill is essential for anyone involved in Business Valuation or planning to sell (or buy) a company.
Need a Professional Assessment? If you're curious about your business's true value and goodwill component, contact SimplyBusinessValuation.com for a comprehensive analysis from certified appraisers.
"Goodwill" is a term often heard in discussions of business sales and valuation, sometimes referred to colloquially as "blue sky" or even an "air ball" in banker slang. But what exactly does it mean?
In simple terms, goodwill is the value of a business beyond the fair market value of its identifiable net assets. It's essentially the premium a buyer pays above the tangible assets and liabilities for the privilege of acquiring a going concern. If a company is sold for more than the worth of its physical assets (after subtracting debts), that difference is called goodwill.
Put another way, goodwill is an intangible asset—one that you can't see or touch, but that still adds real economic value to a company. Classic examples of goodwill include elements like a strong brand name, a loyal customer base, a great reputation in the market, long-standing client contracts, proprietary know-how, efficient business processes, and even an excellent workforce or management team.
These are assets in the truest sense—they help the business make money—yet they aren't listed on the balance sheet in most cases. Goodwill arises precisely because these intangibles have value, even though accounting rules don't normally record them unless a business is sold.
To formalize it, under U.S. accounting standards (GAAP), goodwill is defined according to ASC 350 as "an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized" (FASB.org).
For instance, if a buyer pays $5 million for a company whose identifiable assets minus liabilities are valued at $4 million, the extra $1 million is recorded as goodwill on the acquirer's balance sheet. This accounting goodwill represents things like the acquired company's reputation, customer relationships, and other intangibles that justified the higher purchase price.
Goodwill in accounting has an indefinite life (no set expiration) and isn't amortized annually (under current GAAP)—though companies must test it for impairment (write-downs if it loses value) each year.
However, goodwill in the context of Business Valuation is broader than just an accounting entry. You don't have to formally buy another company to know that your business has goodwill. If your established business could sell for more than the net book value of its assets, that implied extra value is economic goodwill, even if it's not on your balance sheet.
In fact, owners of small and mid-sized businesses often talk about goodwill to mean the overall intangible worth of their company built up over years of hard work. As one valuation expert puts it, goodwill is "often 'created' before the sale by the company's brand, reputation, customer base, talented workforce, technology, or processes"—valuable advantages that don't show up on the balance sheet but do generate future cash flow.
In everyday terms, goodwill is the answer to the question: "What makes this company worth buying as an ongoing business, rather than just buying its assets and starting fresh?"
Crucially, goodwill only has value because it translates into earnings or cash flow. A business with positive goodwill is typically one that can earn more than a "normal" rate of return on its tangible assets, thanks to those intangibles.
To understand why a business can be worth more than its assets, we need to distinguish between tangible and intangible assets.
Tangible assets are physical things you can see and touch—for example, cash, equipment, machinery, vehicles, inventory, buildings, land, and so on. These are listed on your balance sheet and relatively easy to value.
Intangible assets, on the other hand, have no physical form but represent real value drivers for the business. Intangibles include items like trademarks, patents and intellectual property, proprietary software or technology, trade secrets, customer lists, favorable contracts, brand reputation, business know-how, trained employees, and franchise rights—essentially, all the "soft" assets that give a company an edge.
Goodwill is essentially the aggregated value of all those intangible assets that don't show up as separate line items on the balance sheet. In fact, one useful definition calls goodwill "the value of all of the intangible assets of a firm".
Consider a well-known local family restaurant that has been in business for 25 years. Its tangible assets might just be some kitchen equipment and furniture, but its intangible value includes decades of loyal customers, a famous secret recipe, a recognizable name in the community, and perhaps a great location. Those intangibles—goodwill—are the reason a buyer might pay, say, $500,000 for the restaurant even if the physical assets are only worth $100,000.
It's important to note that intangible assets are typically not reflected on your balance sheet unless you acquired them. Accounting rules generally prohibit companies from recording internally generated intangible value as an asset. So you won't see a line for "customer loyalty" or "brand value" on your own financial statements, and "goodwill" won't appear on your balance sheet unless you purchased another business and paid above book value for it.
This is why many business owners are unaware of how much intangible value they've built—the books might show only the tangible net worth. A classic example: Two companies with identical equipment and revenues might have very different sale values because one has a stronger brand and loyal customers. The balance sheets could look similar, but the second company will command a higher price due to goodwill.
Goodwill bridges this gap between book value and true market value. It represents the going-concern value of a business—the idea that an established company can generate earnings by using its assembled resources (equipment, people, processes) more effectively than those resources would be worth on their own.
We see evidence of the power of intangibles all around us. In today's economy, intangible assets constitute an enormous share of business value. A striking statistic: for the companies in the S&P 500 (America's largest corporations), over 90% of their total market value now comes from intangible assets, not physical ones. This is up from around 68% in 1995, showing how much more important things like intellectual property, brand equity, and other intangibles have become.
While that statistic applies to big public companies (tech giants, etc.), the same principle holds for smaller businesses—much of the value is in know-how, relationships, and reputation. Even a local service business or a professional practice often finds that a majority of its appraised value is attributed to goodwill.
For instance, in medical and dental practice sales, industry data shows that on average about 50% of the practice's value comes from goodwill (patient loyalty, practice reputation) rather than tangible assets. In other words, roughly half the value of a typical dental office might be the "blue sky" intangible component.
| Industry | Typical Goodwill % of Total Value | Common EBITDA Multiple |
|---|---|---|
| Manufacturing | 20-40% | 4.2-6.8× |
| Professional Services | 40-70% | 3.5-8.0× |
| Software/SaaS | 70-90% | 8.0-15.0× |
| Healthcare | 45-60% | 5.5-9.0× |
| Retail | 25-50% | 3.0-7.0× |
Source: Pratt's Stats Database, 2024 transaction data
It's clear that goodwill stems from intangible assets, but what specifically causes a business to be worth more than the value of its tangible property? The fundamental reason is excess earning power.
In classic valuation terms, goodwill exists when a company's net earnings exceed a fair return on its net tangible assets. This concept was articulated in the famous IRS valuation ruling (Rev. Rul. 59-60), which stated: "In the final analysis, goodwill is based upon earning capacity. The presence of goodwill and its value...rests upon the excess of net earnings over and above a fair return on the net tangible assets."
In plainer language, if your physical assets alone would typically generate (say) $100,000 of profit but your business is consistently making $300,000, the extra $200,000 is due to intangible factors—that's the essence of goodwill.
Beyond pure earnings, there are many qualitative factors that drive goodwill. Let's examine some key contributors that make a buyer willing to pay more for a business than just the asset values:
Perhaps the most common source of goodwill is a loyal customer base and the expectation of continued patronage. If your business has regular, repeat customers or long-term client contracts, a buyer values that future revenue stream. The IRS's definition of goodwill emphasizes "the expectancy of continued customer patronage" due to a business's name or reputation.
Strong customer relationships translate to future cash flow, which equals value. When customers trust your company and return repeatedly, you've created an intangible asset that competitors can't easily replicate.
A positive brand name or reputation in the market creates trust and can allow you to attract and retain business more easily (and maybe even charge premium prices). Think of goodwill as the value of your good name.
As Rev. Rul. 59-60 noted, factors like "the prestige and renown of the business, the ownership of a trade or brand name, and a record of successful operation over a prolonged period" support the inclusion of intangible value. If people in your market recognize and prefer your company, that goodwill translates to revenue that a newcomer with no reputation would struggle to get.
Human capital is a huge intangible asset. A skilled, well-trained workforce (and key managers who will stay on) can be incredibly valuable to a buyer. It means the business operations and customer service are in capable hands. You "can't put a price" on a deeply knowledgeable team—except that buyers actually do, by paying more for a company that comes with one.
The goodwill from a talented workforce or strong management is often cited in acquisitions. (However, keep in mind if all the know-how resides with the owner alone, that's more like personal goodwill—more on that later.)
If your company owns patents, proprietary software, unique processes, or trade secrets that give it an edge, these intangibles create goodwill value. Intellectual property can be a direct intangible asset on its own, but often its value is rolled into goodwill unless separately valued.
A small tech firm might have developed custom software that isn't on the balance sheet at fair value, yet it drives superior earnings—that is goodwill working in practice.
Any factors that give your business a competitive advantage—perhaps being the market leader in your region, having a prime location, an exclusive license, or high barriers to entry for competitors—will boost intangible value. If a buyer believes your company has an entrenched position that newcomers would have to spend heavily to replicate (or perhaps cannot replicate at all), they will pay for that.
Goodwill often reflects monopoly profits or unique market niches the company enjoys.
Efficient, well-documented business processes, strong operational systems, and a unique way of delivering products or services can also contribute to goodwill. These are part of the company's know-how. A franchisor, for instance, might have a whole system that makes their outlets successful—that organizational capital is an intangible asset.
The stability and quality of earnings also play a role in goodwill. If your revenue is recurring (e.g., subscription model or long-term contracts) or you have a large, diversified customer base, the business is lower risk and more attractive.
Buyers will pay a higher multiple of earnings (which means more goodwill) for a company with predictable revenues and broad clientele. A software company with subscription income and 1,000 customers has far more goodwill than one doing one-off project sales to 5 big clients—the latter is riskier.
Goodwill isn't just about current earnings; it also reflects expectations of future economic benefits. If buyers see clear avenues for growth—perhaps your industry is on the rise, or your company has untapped markets—they may pay extra today for that future upside.
Essentially, part of goodwill is the present value of expected future growth. As Investopedia notes, a company's goodwill increases when "expectations for economic growth are added to the equation" beyond current earnings.
To illustrate how these factors translate into value, consider this example: Company ABC has $2 million in annual EBITDA and operates in a stable industry. Similar businesses typically sell for around a 6× EBITDA multiple. Suppose ABC therefore is valued around $12 million (6 × $2M) by buyers.
Now, on ABC's balance sheet, let's say the tangible assets (equipment, inventory, etc.) minus liabilities equal $5 million. The difference—roughly $7 million—is goodwill in this deal.
What makes up that $7 million? Likely ABC's strong customer relationships, brand name, recurring service contracts, a great management team, and perhaps proprietary products. Those intangibles enable ABC to generate the earnings and get a 6× multiple, and they are precisely what a new owner is buying beyond the hard assets.
If ABC lacked those factors—say it had no customer loyalty, weak brand, high customer concentration—it might not sell for 6× earnings, or might have lower earnings to begin with. Thus, goodwill is a reflection of all the elements that make Company ABC an attractive, money-making enterprise beyond just its physical stuff.
Now that we know what goodwill represents and why it exists, you might be wondering how to measure it. In a real business sale or valuation, calculating goodwill is straightforward in concept: Goodwill = Purchase Price – Fair Market Value of Net Identifiable Assets.
Essentially, you take what the whole business is worth (or sold for) and subtract everything you could separately identify and value (tangible assets and any identifiable intangible assets). Whatever is left is goodwill.
Consider this scenario: imagine you decide to sell your company and the agreed purchase price is $1,000,000. During negotiations (often as part of the purchase price allocation in an asset sale), you and the buyer assign values to the tangible assets and certain intangibles being acquired.
Let's say in this deal, the buyer and seller allocate:
These allocations total $400,000. After subtracting that from the $1,000,000 price, the remaining $600,000 is goodwill.
We can double-check that by the formula: assume the business's balance sheet assets minus liabilities equaled $400,000 in fair value; price $1,000,000 minus $400,000 net assets = $600,000 goodwill. This goodwill figure would be recorded on the buyer's books as an intangible asset post-acquisition, but more importantly it reflects the economic premium your business commanded due to its intangible qualities.
It's worth noting that goodwill can be estimated even if you're not selling the business right now. Appraisers calculating fair market value (for purposes like estate planning, buying out a partner, etc.) will effectively do the same: value the whole business under various approaches, then subtract tangible asset value to see what portion is attributable to goodwill.
If you use an income approach (like a discounted cash flow or earnings capitalization) to value the company as a going concern, you're inherently valuing both tangibles and intangibles together. To derive goodwill, you could then subtract the net tangible asset value (often based on an adjusted balance sheet at market values). The remainder is implicit goodwill.
This is why sometimes people talk about "net tangible asset value" vs. "enterprise value." Enterprise value (or total business value) minus net tangible assets equals goodwill (plus any other unrecorded intangibles).
Keep in mind, goodwill is a residual value—it's what's left after you've identified all other assets. Some intangible assets can be separately identified and valued (for instance, you might value a patent or a customer list on its own); those wouldn't be part of goodwill if they're explicitly valued in a deal. But most of the softer factors (reputation, assembled workforce, etc.) are not usually carved out separately; they roll up into goodwill.
To make this concrete with our formula:
Goodwill = Business Value (or Price) - (Assets at FMV - Liabilities at FMV)
This formula is straightforward and is used in every business acquisition accounting. The harder part is determining the business value in the first place—that's where valuation methods come in (income approach, market comparables, etc.). Once that's done, backing into goodwill is easy.
One advisor described a situation: A buyer and seller agreed on a price of $650,000 for a small business that had a book value of only $300,000 in net assets. Using the formula, goodwill would be $650,000 – $300,000 = $350,000.
That $350K would be recorded on the buyer's books as goodwill after the sale, and it represents all the intangible value the buyer is effectively purchasing. It also "rectifies the true value of the business (as agreed upon by buyer and seller) and basic book value, which is usually much lower". In other words, goodwill accounts for why the market value is higher than the book value.
There's often confusion between the accounting concept of goodwill and the economic reality of goodwill value. For clarity, let's examine both perspectives:
Accounting Goodwill is a number recorded on financial statements only when a business combination occurs. It has specific rules attached—for instance, under GAAP, public companies don't amortize goodwill but must test it for impairment annually, writing it down if the acquired business underperforms.
Goodwill sits as an asset on the balance sheet of the acquirer and represents the future economic benefits arising from assets that could not be individually identified and valued at the time of acquisition. Importantly, internally generated goodwill is never recorded on your own company's books.
So a thriving business that's grown organically for 20 years might have zero goodwill on its balance sheet, whereas a company that grew by acquisitions could have large goodwill entries—it's more a reflection of past M&A activity than of the current state of intangible value.
Goodwill in Business Value (Economic Goodwill) is what we've been discussing as the intangible value that makes a business worth more than its assets. It exists regardless of whether it's recorded formally. Every business has an inherent goodwill (which could be positive, zero, or even negative) based on its ability to generate earnings over and above a fair return on assets.
When valuing a company, professionals absolutely consider these intangibles and effectively calculate goodwill as part of determining the fair market value. It's a very real component of what a business is worth to a buyer.
For business owners and CPAs, the key is to not rely solely on the balance sheet to gauge a company's true value. The balance sheet might severely understate a healthy company's worth because it leaves out intangible assets and going-concern value.
A classic scenario: A CPA preparing a client's financial statements might show shareholder equity (book value) of, say, $500,000. The owner might think, "Well, I could probably sell for a lot more than that—I have a steady profit stream and loyal clients." And the owner is likely right, because the market value takes into account those intangibles and the profitable operations. That difference is goodwill.
On the flip side, CPAs also need to handle accounting goodwill properly when acquisitions occur. After a purchase, goodwill gets recorded and then possibly amortized (private companies have an option to amortize over 10 years under certain standards) or tested for impairment.
A business owner might notice that in years after buying a business, their CPA may do impairment tests and possibly write down goodwill if the business under-delivers. That doesn't directly affect cash, but it's acknowledging that the intangible asset's fair value has fallen below book value.
The main point here is: Don't equate a lack of goodwill on the balance sheet with a lack of goodwill in reality. Also, don't assume the exact accounting number for goodwill (from a past acquisition) is the current value of goodwill—it might be less or more, depending on how the business has evolved.
Economic goodwill can grow if the business grows stronger (though accounting goodwill won't increase since accounting is conservative about that).
In summary, accounting is a backward-looking system that records what was paid for goodwill at a transaction date and generally carries it at that historical value (unless impaired). Valuation is a forward-looking exercise that cares about what those intangibles mean for future earnings and how much a buyer would pay today.
Both views revolve around the same concept (the extra value of intangibles), but they treat them differently. If you're trying to understand your business's value, focus on the economic/valuation perspective.
When discussing goodwill, especially for small and mid-sized companies, an important distinction sometimes comes up: business (enterprise) goodwill vs. personal goodwill. Not all goodwill is equal in the eyes of buyers, and understanding this can help you manage and maximize your company's intangible value.
Business Goodwill (Enterprise Goodwill) is the portion of goodwill that is attributed to the business itself as an institution—independent of any specific owner or individual. It exists when the company's value would largely carry on even if the current owner or key personnel leave (assuming competent replacements).
Indicators of strong business goodwill include having a well-known business name separate from the owner's identity, a broad base of customers tied to the company (not just to one salesperson or owner), established location, processes and systems, a team in place, and a brand reputation that transcends any one person.
A retail store or a manufacturing company where the owners aren't public-facing might have goodwill entirely as a business asset. Business goodwill is owned by the company—in a sale, it's what the company (or its shareholders collectively) is transferring to the buyer.
Personal Goodwill refers to goodwill that is attributed to an individual owner's or key person's personal attributes—such as their personal reputation, skills, relationships, or expertise. In some businesses, especially professional practices or service companies, the owner is the business in the clients' eyes.
If a renowned doctor has patients who insist on seeing that doctor, or a consultant has clients solely due to personal trust, that goodwill is personal to that professional. If they were to leave, a lot of the clientele might not stick around. Personal goodwill is essentially the value that would leave the door with the person if they didn't stay.
To illustrate this distinction, consider two contrasting legal precedents:
Martin Ice Cream Co. v. Commissioner (110 T.C. 189, 1998): In this landmark case, the Tax Court recognized that certain goodwill belonged personally to the business owner rather than the corporation. The case involved a successful ice cream distributor where the owner's personal relationships with customers were deemed separate from the corporate entity, creating personal goodwill that could be treated differently for tax purposes.
Contrast this with a platform SaaS business: A subscription software company with 10,000 customers who interact primarily through automated systems, customer support teams, and digital interfaces represents pure enterprise goodwill. The customers are loyal to the product and platform, not to any individual person. This goodwill clearly transfers with the business.
For one, in valuation and deal structuring, a business with high personal goodwill is riskier for a buyer. If the owner's departure could cause revenue to drop significantly, a buyer will be cautious and might pay less (or require conditions like earn-outs to ensure customers stay).
From the seller's perspective, if you can show that most goodwill is enterprise goodwill (transferable), you can command a better price. If goodwill is personal, sometimes sellers will mitigate this by agreeing to employment contracts, transition periods, or consulting agreements so that the personal element effectively transfers over time.
There's also a tax consideration: in some cases (especially for C-corporations in the U.S.), allocating some goodwill as personal goodwill can allow that portion of the sale to be treated as a direct sale of a personal asset (taxed at capital gains to the individual) rather than a corporate asset (which could face double taxation).
Courts have recognized personal goodwill as a distinct asset in certain cases, building on precedents like Martin Ice Cream. However, this is a complex area and requires careful planning and evidence that the goodwill is truly personal (for example, no non-compete in place that would have transferred it to the company).
From a business improvement standpoint, if you are an owner, you want to convert personal goodwill into enterprise goodwill before selling. That means:
The more a buyer believes the earnings will continue without you, the more they are willing to pay—which effectively means a higher portion of goodwill is considered "business goodwill."
Suppose you run a consulting firm where you have all the key client relationships. Right now, most of the goodwill is personal to you. If you plan to sell in a few years, you might start introducing junior partners to clients, transitioning relationships, and building the firm's brand as more than just your name.
Over time, clients come to trust the firm, not only you. At that point, the goodwill has shifted to the enterprise. This strategy can significantly increase the salability and value of your business.
In summary, business goodwill is part of the company and stays with it, while personal goodwill "walks out" with the individual. Most small businesses have a mix of both. From a buyer's viewpoint, the ideal scenario is 100% business goodwill, because they are buying an asset that remains intact post-sale.
Goodwill is generally a positive sign—it means your business has built up intangible value and can sell for more. In fact, goodwill can be viewed as an indicator of success: "At the end of the day, goodwill is a powerful sign of success," as one M&A professional wrote.
A company with significant goodwill has proven it can generate earnings beyond its asset base, which is precisely what most buyers want. However, having a lot of goodwill in a deal does introduce some practical considerations in financing and structuring a sale.
If a large portion of the purchase price is goodwill (i.e., not backed by hard assets), traditional lenders like banks can be hesitant. Banks prefer collateral—assets they can sell if the loan defaults. Tangible assets like equipment and real estate are great collateral because the bank can appraise and liquidate them.
Goodwill, by contrast, cannot be repossessed or easily sold off. A bank can't foreclose on "customer loyalty" and auction it; that value evaporates if the business fails. As a result, banks often view loans financing goodwill as higher risk and may lend a smaller amount relative to the purchase price.
This is where deals often require creative solutions: larger down payments, seller financing (the seller takes a note for part of the price), or using the U.S. Small Business Administration (SBA) loan programs.
The SBA 7(a) loan program is a popular tool in deals up to $5 million; the SBA provides a guarantee (often 75%) to the bank, which encourages banks to lend on businesses that have significant goodwill by reducing their risk.
However, there are specific guidelines regarding intangible assets in SBA financing. According to SBA SOP 50 10 version 8 (effective June 1, 2025), when aggregate goodwill plus other intangibles exceed either $250,000 or 50% of the loan amount (whichever is lower), the SBA requires a third-party Business Valuation to substantiate the intangible value (SBA.gov). This long-standing rule ensures that goodwill allocations are reasonable and supportable.
A typical capital stack for middle-market acquisitions might be something like 50% equity and 50% debt. If goodwill is a big component, that equity portion ensures the bank isn't overexposed to unsecured value.
In a $12 million deal with a high goodwill portion, a buyer might put $6 million cash and the bank lends $6 million. If only $5 million of that $12M is tangible assets, then the bank effectively has only $1M "in the air" beyond collateral (since $5M of the loan is backed by assets, the other $1M isn't). That might be acceptable, whereas if the buyer only put $2M down and asked the bank for $10M when assets are $5M, the bank has $5M unsecured—much riskier.
Thus, deals with high goodwill often need higher equity contributions or guarantees (like SBA backing) to secure financing.
For a seller, this means if your business has a lot of goodwill (which is good in value), you should be prepared that a buyer might ask you to carry a note or that the pool of eligible buyers may be limited to those with sufficient cash or financing alternatives.
Many small business sales include a seller note or earn-out to bridge gaps and also to give the buyer confidence (and the bank, if involved). If a large portion of the price is goodwill, the buyer is essentially betting on the continued performance of those intangibles. This inherently carries more risk than buying hard assets.
If the goodwill doesn't pan out—say, key customers leave or a new competitor erodes the brand's appeal—the buyer overpaid. That's why in deals heavy on goodwill, buyers might structure contingent payments (earn-outs) where part of the price is paid only if the business hits certain targets post-sale.
Goodwill also has different tax treatment compared to tangible assets. For the seller, amounts allocated to goodwill are usually taxed at long-term capital gains rates, which in the U.S. (federal) are typically 15% to 20% for most taxpayers, with high-income earners potentially paying 23.8% (20% plus the 3.8% Net Investment Income Tax).
This is favorable compared to, say, the portion of sale allocated to inventory (taxed as ordinary income) or equipment which might trigger depreciation recapture (also taxed at higher rates). So sellers generally prefer more of the price be allocated to goodwill if possible.
The buyer, conversely, cannot immediately deduct goodwill. For tax purposes, goodwill must be amortized over 15 years under current U.S. tax law (Section 197) (IRS.gov). Buyers often prefer allocations to assets like equipment which they can depreciate faster.
Important note: in stock deals (where the buyer purchases company shares rather than assets), the buyer doesn't get the goodwill amortization deduction since no new tax basis is created for the assets.
On a more positive note, when goodwill is significant, both sellers and buyers will pay close attention to the "value drivers" behind it during due diligence. Sellers should be ready to demonstrate what's creating their goodwill—e.g., "Our customer retention rate is 95% year over year," "We have X thousand social media followers and a recognizable brand in our niche," "80% of our revenue is recurring contracts."
Buyers will scrutinize these claims because they justify the premium. It's smart for owners to document and substantiate the elements of goodwill. During due diligence, a buyer might even commission a quality of earnings report or customer satisfaction analysis to gauge how solid the goodwill is.
If goodwill comes mostly from a few big customer contracts, a buyer will ask: how long are those contracts, how strong is the relationship, can it be transferred? If from a great location, is the lease secure? Knowing these factors helps both sides plan (and helps sellers shore up any weaknesses before sale).
Given that goodwill can form a large part of your business's value, how can you maximize it? And if you're not selling yet, how do you grow this intangible value over time? This essentially boils down to strengthening those factors we listed earlier that drive goodwill, and reducing risks that undermine goodwill.
Invest in your brand's visibility and reputation. This could mean marketing efforts, quality improvements, community engagement, and excellent customer service. A recognizable brand that carries positive associations in your market will directly translate into goodwill.
Customers often choose known brands over unknown alternatives, allowing you to generate higher revenue—and buyers will pay for that reputation. Consider developing trademark protection for your brand name or logo if they carry significant weight in your market.
Work on improving customer satisfaction and loyalty programs so that your customer base is not only loyal but also broad. If you can show high customer retention and a lack of heavy dependence on any single client, your goodwill value goes up.
A diversified customer base reduces risk (no single customer can make or break the business). Consider metrics like Net Promoter Score or repeat purchase rates—improving those is essentially increasing goodwill. Also, seek to get long-term contracts or subscriptions in place if feasible; recurring revenue streams are golden for goodwill.
If all knowledge and decision-making resides with you (the owner), start developing a second-in-command and standardized processes. Train your team to handle key relationships. Create manuals or SOPs for operations.
In short, make the business run smoothly without your daily presence. This effort moves goodwill from personal to enterprise and makes the goodwill more valuable and durable. A buyer will value a business higher if they see a capable management team and documented systems that will remain after the owner exits.
If you have unique technology, formulas, designs, or content, ensure you protect it (through patents, trademarks, copyrights, or keeping trade secrets secure). Protected IP can enhance goodwill since it's an exclusive asset that underpins earnings.
If you haven't already, register your brand name or logo as trademarks if they carry weight. Any proprietary edge you can legally secure becomes part of intangible value.
Goodwill can be eroded by perceived operational risks. If all your product comes from one supplier, that's a vulnerability. Similarly, if a key employee or a key product line is a single point of failure, address that.
By diversifying suppliers, cross-training employees, and developing multiple revenue streams, you reduce risk, which in turn increases the multiple a buyer might pay (higher multiple = more goodwill). Essentially, de-risking the business makes the intangible future earnings more certain, which makes them more valuable.
Keep clear records of your financials, customer contracts, employee agreements, intellectual property rights, etc. Clean books and records don't directly create goodwill, but they give buyers confidence in the intangibles.
If you claim you have a loyal customer base, being able to produce customer lists, references, and retention stats will solidify that as quantifiable goodwill. If your narrative is "we have great employees," having low turnover data or employee satisfaction surveys could help. Essentially, make the invisible visible through documentation.
Continue to grow your revenues and profits in a steady way. Goodwill thrives on the expectation of future cash flow. If you demonstrate consistent growth, buyers will project that into the future and effectively "prepay" you for it through a higher price.
Avoiding wild earnings swings or demonstrating that you can handle industry changes helps preserve goodwill value. If there are downturns (say an economic dip), highlight how you navigated them and bounced back; that can actually show the strength of your business model and customer loyalty.
If one salesperson brings in 50% of your business, or one technical guru holds all the know-how, try to mitigate that. Perhaps implement non-compete and retention agreements with key employees to ensure they'll stick around for a transition.
Encourage knowledge sharing within the company. A buyer will view goodwill as more solid if it's not jeopardized by one employee quitting. Sometimes even just having stay bonuses or transition plans for key staff can reassure buyers that the goodwill tied to those people will remain after closing.
Consider doing a quality of earnings (QoE) review or having a CPA go through your books before selling. This ties to documentation, but it's basically ensuring your financials accurately reflect your earnings power without unusual expenses or owner-specific perks.
By normalizing earnings, you present a clear picture of cash flow attributable to goodwill (and everything else). Any uncertainty or messiness in financials will cause a buyer to discount intangible value because they can't be sure how robust the real earnings are.
If you anticipate selling in a year or two, try to lock in as many goodwill-driving elements as possible. For instance, secure multi-year contracts with top customers now, renew that favorable lease on your prime location, file that patent, or extend employment contracts with key managers.
By doing these, you make sure the goodwill (customer loyalty, location advantage, intellectual property, team stability) is not transient—it's contractually or legally bolstered for the future owner. This makes your goodwill tangible in a sense and definitely more valuable to a buyer.
Understanding goodwill conceptually is one thing—quantifying it for your business is another. If you're seriously curious about how much your business is worth (and how much of that is goodwill), it may be time to consider a professional Business Valuation.
Experienced business valuators have methodologies to tease out the intangible value and give you a realistic estimate of what a buyer would pay. This can be invaluable for owners making decisions about selling, estate planning, or even just benchmarking the company's performance.
As a business owner, you might have an emotional attachment or, alternatively, be too conservative in estimating your intangible value. A neutral expert will look at the cold hard facts—your financials, market comps, risk factors—and arrive at an unbiased value for the business. From that, they can derive the goodwill component.
Professional appraisers often use multiple approaches to triangulate value. For goodwill, they might explicitly use an excess earnings method (especially common in small business valuations) where they allocate a return to tangible assets and see what earnings are left attributable to goodwill.
However, it's important to note that the IRS views the excess earnings method as a "method of last resort" in their audit technique guides, urging corroboration with market data (IRS.gov). This is why professional valuators typically use multiple approaches to support their conclusions.
They also can leverage market data—for instance, knowing that, in your industry, similar businesses have sold for X times revenue and that typically corresponds to Y% goodwill. They bring data such as transaction databases and industry studies that are hard to access as an individual owner.
Professional valuators must meet rigorous educational and experience requirements. For instance:
Professional business valuators must adhere to USPAP (Uniform Standards of Professional Appraisal Practice) Standards 9 & 10, which govern Business Valuation practice (AppraisalFoundation.org). These standards ensure consistent methodology and ethical practice across the industry.
Some states mandate biennial USPAP updates for licensed appraisers, ensuring practitioners stay current with evolving standards and methodologies.
A good valuation report will not just spit out numbers, but also explain why your business is valued as it is and what factors are contributing. In doing so, it essentially identifies your goodwill drivers.
For example, it might highlight that your customer concentration is low (a positive for goodwill) or that your margins are above industry (implying some competitive advantage intangibles at play). This insight is extremely useful: it validates what parts of your business are adding the most intangible value and might point out weaknesses that, if improved, could increase goodwill.
As an owner, knowing the breakdown of your business's value—"$X comes from tangible assets, and an additional $Y is goodwill"—can inform your strategy. If the goodwill portion is smaller than you expected, you might decide to delay selling and focus on building those intangibles.
If it's larger than you thought, that could encourage you that selling would yield a great return or at least reassure you that your life's work has indeed created significant invisible wealth.
When you eventually do go to market to sell the business, having a recent independent valuation can bolster buyer confidence. It's not meant to replace their own due diligence, but if you can show a solid report from a certified appraiser that details the valuation (including the rationale for goodwill), serious buyers will view that as a sign the seller is realistic and prepared.
Firms like SimplyBusinessValuation.com incorporate the analysis of both tangible and intangible factors in their valuation reports. They acknowledge that a pure asset-based approach could undervalue a profitable company by ignoring intangibles, so they ensure to adjust for and capture those intangible elements in their valuations.
At Simply Business Valuation, certified appraisers will typically perform an income approach (to capture earning power, hence goodwill) and a market approach (to see what similar businesses including their goodwill have sold for) alongside an asset approach (for baseline tangible value). By correlating these, they can back into how much of your business's worth is due to goodwill.
Their services are geared towards small and mid-sized enterprises, meaning they understand things like personal vs enterprise goodwill in these contexts, the common range of goodwill in various industries, and the adjustments to make for an owner-operated business. Their reports detail these aspects in a user-friendly way, which helps owners and their financial advisors trust the numbers.
They offer an affordable, efficient process (often delivering reports in about 5 days, with no upfront payment and a risk-free guarantee)—making professional valuation accessible to business owners who may have thought it too expensive or complicated.
Getting a professional valuation is a smart move if you need a reliable answer to "what is my business really worth, and why?" It will explicitly address the question we started with: Is my business worth more than its assets?—by how much, and due to what.
The simplest sign is if your business is profitable and would attract a buyer willing to pay more than the value of your net assets. If your earnings provide a good return in excess of what the tangible assets alone would justify, that excess is due to goodwill.
For example, if you could sell your company for several times the net book value of its assets, you definitely have goodwill. Qualitative signs include having loyal customers who would stick with the business, a known brand, or other advantages that a new owner couldn't easily replicate by just buying similar equipment.
Virtually all established, profitable small businesses have some goodwill—it's rare that a going concern is worth only its asset liquidation value (that usually only happens for distressed businesses).
Goodwill isn't a single item but a collection of intangible elements. Some concrete examples include:
For instance, if you run a landscaping company, goodwill might include your well-known name in the region, your long-term clients who automatically renew each year, and your staff who know every lawn in detail. These aren't physical assets you can auction, but they make the business earn money consistently—and a buyer will pay for them.
Goodwill in a sale is calculated as the difference between the total sale price and the fair market value of the identifiable net assets included in the sale. The formula is: Goodwill = Purchase Price – (Assets – Liabilities) (all at market value).
Practically, during an asset sale, buyer and seller agree how to allocate the price among categories. They will assign values to tangible assets like equipment and inventory, and sometimes to specific intangibles like customer lists or non-compete agreements. Whatever portion of the price is left unassigned is labeled "goodwill."
If a business sells for $1,000,000 and the assets (after adjusting for liabilities) are valued at $700,000, then goodwill is $300,000. From the seller's perspective, you don't usually calculate goodwill first—you negotiate the overall price, and goodwill shakes out as the residual number.
Yes, it's possible, though it's generally not a good sign. If your business is struggling—for instance, it's losing money or barely breaking even—a buyer might only be willing to pay for the tangible assets at their fire-sale value (or even less, considering hassle and depreciation).
In such a case, the going concern doesn't add value; it subtracts value, and you have "negative goodwill." Accountants call it a bargain purchase when a company is acquired for less than the fair value of its net assets.
This often happens if a business is distressed, facing bankruptcy, or if the assets are worth more sold separately than the business is as an operating entity. If you find that the only offers for your business are below asset value, it's a signal that the business's operations are actually destroying value.
Goodwill appears on a company's balance sheet only if it was acquired through purchasing another business. Accounting principles do not allow you to internally recognize or grow goodwill on your own financial statements.
So even if you've built tremendous intangible value, it stays "off-book" until a transaction triggers its recognition. If your balance sheet shows $0 goodwill, that's normal for a company that's grown organically.
If you were to sell your business, the buyer's balance sheet would then show goodwill based on the purchase. It's purely an accounting convention to prevent companies from inflating their assets with subjective valuations of their own brand or reputation.
Focus on strengthening the underlying drivers of intangible value:
Essentially, anything that improves steady future earnings or reduces the risk to those earnings will increase goodwill. Keep your financial performance solid; growing revenues and profits while keeping the business's risk profile low is the surefire way to boost goodwill value.
After a sale, any goodwill associated with your business is essentially transferred to the new owner as part of the purchase. The buyer will record that goodwill as an asset on their balance sheet.
From that point, the buyer is responsible for maintaining that goodwill. If the transition goes well and the business continues to perform, that goodwill stays intact. If something goes wrong—say the customers don't stick around despite the change in ownership—the buyer might later have to write down some of that goodwill as impaired.
As the seller, you receive payment for the goodwill at closing (assuming a lump sum deal). Often, as a seller, you may also sign a non-compete agreement when you sell—this ensures you don't take back the personal element of goodwill by starting a competing business and luring customers away.
Goodwill is an intangible asset, but not all intangible assets are goodwill. Intangible assets can be two types: identifiable intangibles (which can be separated or valued on their own) and unidentifiable intangibles.
Identifiable intangible assets might include things like patents, trademarks, copyrights, customer lists, franchise agreements, software, etc. These can sometimes be valued individually and even sold or transferred individually.
Goodwill falls into the unidentifiable category—it's a composite intangible value that can't be neatly separated. Goodwill then covers everything that's left—often things like reputation, employee know-how, customer loyalty that isn't tied to a contract, and general going-concern value.
Think of goodwill as a subset of intangibles—specifically the portion of intangible value that cannot be individually identified and is often dependent on the whole combined business.
Professional valuators evaluate goodwill by analyzing the company's earnings and the adequacy of its tangible asset base, as well as looking at market indications. One common approach is the excess earnings method, where the valuator will:
Then those excess earnings are capitalized to get a goodwill value. Another approach is through comparable sales: if data shows similar businesses selling at, say, 3× book value on average, then implicitly those had a lot of goodwill.
During due diligence, a buyer might even commission a quality of earnings report or customer satisfaction analysis to gauge how solid the goodwill is. Evaluators consider historical earnings, expected future earnings, and risk—goodwill is captured in those because higher sustainable earnings and lower risk equate to a higher valuation multiple.
Yes. For the seller, goodwill is typically treated as a capital asset. That means if you held the business for more than a year, the gain attributed to goodwill is taxed at long-term capital gains tax rates.
Currently federal long-term capital gains rates range from 0% to 23.8% (including the Net Investment Income Tax for high earners), which are lower than ordinary income tax rates. This is advantageous compared to some other asset allocations—inventory is taxed as ordinary income, and equipment may trigger depreciation recapture at higher rates.
For the buyer, goodwill is not immediately expensed but can be amortized over 15 years for tax purposes (under IRS Section 197). So the buyer gets a deduction spread out over a long time.
Always consult a tax professional when structuring a sale because the allocation can make a big difference in after-tax proceeds. Usually, both sides find a reasonable middle ground in allocation.
Asset Approach: A method of valuing a business by calculating the market value of its assets and liabilities (essentially determining the net asset value). It often serves as a floor value—what the company is worth if sold for parts. This approach may undervalue a profitable business because it can ignore intangible value (goodwill).
Book Value: The value of an asset or a business according to its balance sheet (accounting records). For a company, book value of equity equals assets minus liabilities as recorded on the books. This is often based on historical costs and accounting rules, not current market value. Book value usually excludes goodwill unless the company acquired another business.
Blue Sky: A slang term for the intangible value of a business beyond its tangible assets—essentially synonymous with goodwill. If someone paid $1M for a business with $600k in assets, the extra $400k is "blue sky." The term implies the somewhat nebulous nature of this value.
Capitalization Rate (Cap Rate): In valuation, particularly the income approach, the cap rate is a rate used to convert a single year's earnings into a value. It's essentially the required rate of return minus long-term growth, or the inverse of a valuation multiple. A higher cap rate means higher perceived risk (lower multiple), and a lower cap rate means lower risk (higher multiple).
Discounted Cash Flow (DCF): An income valuation method where projected future cash flows are discounted back to present value using a discount rate. It accounts explicitly for growth and risk. DCF will inherently include goodwill because it's valuing all future cash flows of the business (tangible and intangible factors combined).
EBITDA: Stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a commonly used measure of a company's operating cash flow proxy, often used in valuation multiples. Buyers like it because it's before debt and non-cash charges, making companies more comparable.
Excess Earnings Method: A specific valuation method that separates the return on tangible assets from excess return attributable to goodwill. First, it assigns a fair return to the company's tangible assets. Any company earnings above that are considered produced by intangibles. Then those excess earnings are capitalized to determine goodwill value.
Fair Market Value (FMV): The price at which an asset would change hands between a willing buyer and seller, both having reasonable knowledge of relevant facts and neither under compulsion. For a business, FMV means what an unrelated buyer would pay for the company in an open and unrestricted market.
Going Concern Value: The value of a business as an ongoing operating entity, as opposed to just its liquidation value. Going concern value includes the intangible worth of being in operation—having an established workforce, systems in place, and the ability to continue earning revenue.
Goodwill: In Business Valuation, goodwill is the intangible value that makes a business worth more than the sum of its identifiable assets minus liabilities. It encompasses things like reputation, customer loyalty, brand name, and other factors that generate excess earnings. In accounting, goodwill is recorded only when one company acquires another for a price above the fair value of net assets.
Goodwill Impairment: An accounting term for when the recorded goodwill on a company's balance sheet is determined to be greater than its fair value. The company must then write down the goodwill to its new fair value, taking an impairment charge on the income statement.
Identifiable Intangible Assets: These are intangible assets that can be separated from goodwill and sold, licensed, rented, or otherwise transferred. Examples include patents, trademarks, customer contracts, franchise agreements. When a business is acquired, these assets are valued individually and recorded separate from goodwill.
Market Approach: A valuation approach that derives value from comparisons to market prices of similar businesses or transactions. For example, looking at recent sales of comparable companies to estimate a likely selling multiple for the business.
Net Tangible Assets: The value of all physical (tangible) assets minus liabilities. In other words, the equity of the company excluding goodwill and other intangible assets. It's used in valuations to separate what portion of value is backed by tangibles.
Personal Goodwill: The portion of goodwill that is attributed to an individual's personal attributes (relationships, skills, reputation). It's essentially intangible value that would not necessarily transfer to a new owner. For example, if a consulting firm's clients only trust the founder, the goodwill associated with those client relationships is personal to the founder.
Enterprise Goodwill (Business Goodwill): The portion of goodwill inherent in the business itself, independent of any specific individual. This is goodwill that stays with the company through a change of ownership—such as a strong brand, location advantage, proprietary product, or processes.
Seller's Discretionary Earnings (SDE): A cash flow measure used often in small Business Valuation. It's typically the business's net profit plus any expenses that are the owner's benefits/perks and non-cash charges, with one owner's salary added back. It represents total financial benefit to a single full-time owner-operator.
Last updated: July 2025
Sources and Further Reading: The insights and facts in this article are supported by reputable U.S. sources, including the Financial Accounting Standards Board (FASB), IRS publications, SBA loan programs, professional appraisal organizations (AICPA, ASA), and contemporary M&A research. Notable references include FASB ASC 350 on goodwill accounting, IRS Revenue Ruling 59-60 on Business Valuation, and SBA SOP 50 10 on loan program requirements. For comprehensive Business Valuation services that properly account for goodwill and intangible assets, visit SimplyBusinessValuation.com.
