Goodwill is always a win for the business seller.  It represents the amount in excess of the money paid to purchase the seller’s business over the identified total value of the tangible assets, less the liabilities.

For the buyer, Goodwill comes down to the expectation of future economic benefits from buying the business.

Only time will tell if the buyer is a winner.  If the buyer earns more off the business than the premium they paid for it, they are the winner.  Otherwise, they will have paid a premium to learn what they didn’t know before overpaying for the business they bought.

Overview

Goodwill is an intangible, non-physical business asset.  It arises when the purchase price is above its asset value.  Its long-term value reflects how well the new business owners can generate profits from the sales and operations of the acquired business.

Goodwill is calculated as the purchase cost of the business minus the fair market value of the business, reflecting tangible assets and intangible assets of the business.  In most small business acquisitions, goodwill is often found in the strength of the customer base, operating processes, business reputation, associated industry profit multiplier, and the buyer’s expectation of future economic benefits.

Goodwill only appears on the balance sheet under Other Fixed Assets of the acquiring company, reflecting the amount paid above and beyond the net value of the acquired company’s identifiable assets.

Ultimately, Goodwill reflects the agreed valuation for a business that someone is prepared to pay and the amount the current owner is prepared to accept.  It is great for the seller in that they are getting more than the tangible asset value of the business.

For the buyer, Goodwill is a premium paid to acquire a business they believe will be of more significant economic benefit over time than the premium they pay to own the business today.  Only time will tell if the buyer is a winner.  If the buyer earns more off the business than the premium they paid for it, they are the winner.  Otherwise, they will have paid a premium to learn what they didn’t know before overpaying for the business they bought.