Originally written by jamesjohnson on Small Business
When looking to buy or sell a business its value will be more than just the assets it holds. One of more intangible assets to value is goodwill – the magic sauce that makes one business attract a higher valuation than another that may appear to be similar.
Goodwill is the value that someone is prepared to pay for a business above and beyond the value of its assets. That will include the strength of a business’s brand, customer databases and those aspects of a business that add value to a buyer.
For most businesses, the value of goodwill is tied into its current and future earnings – what do the future profits of the business look like and can that profitability be increased – sometimes called “super profits”.
How to value the goodwill
In calculating goodwill, your accountant would start with the profit and loss accounts of the business, typically for the last three years. Some adjustments might be necessary to arrive at the profits for the goodwill calculation, sometimes called the average maintainable earnings.
The most usual adjustment is for payments to the owner or manager over and above a reasonable salary for the work they do.
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