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This is probably the most frequent question asked when we value businesses for sale.
Goodwill is the difference between the appraised value of the stock or capital of a business and its book value. We determine appraised value using the market approach (based on sales of comparable businesses) and the income approach (based on expected earnings and cash flow). Book value is recorded on the balance sheet and reflects assets less liabilities.
If goodwill is positive/negative, the business is worth more/less than book value by that amount. Positive goodwill means that intangible (not recorded on the balance sheet) assets like brand names, customer lists, and intellectual property add value to the business because its assets (tangible and intangible) earn more than the tangible assets all by themselves. Negative goodwill means that intangible liabilities (like legal claims and environmental liabilities) reduce its value.
The value of goodwill is ALWAYS included in appraised value. It is NOT a separate add-on. Goodwill reflects expected sales, earnings, and cash flow. It is NOT payment to the owner for sweat equity invested in building and managing the business. They were (hopefully) already paid for that.
In some cases, accounting rules require that the goodwill of acquired businesses be allocated to specific intangible assets. This process, which we perform for many buyers, does not change anything; it simply identifies and values the components of goodwill.
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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations. For more information, visit www.wesresvaluation.com or call (614) 448-3700.
Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please www.wesrespartners.com or call (216) 589-0900.