What is goodwill in business valuation?

by | May 6, 2022 | Blog, Running a business

When it finally comes to selling your business, you’ll have your assets examined as well as your business as a whole, to determine its real value. 

But it doesn’t stop at your tangible assets, your reputation and the reputation of your business are also taken into account, this is called goodwill.

Calculating the value of your goodwill can be a complicated process, in fact, there are a couple of different methods by which it can be valued. This post will explain the different ways goodwill can be calculated against your business’s worth.

The basics

As mentioned, goodwill is an intangible asset associated with the sale value of your business. It’s the amount of money in the purchase which is higher than the net value of all the assets purchased in an acquisition or valuation. Certain things will be in consideration when valuing goodwill:

  • Value of the company’s brand
  • Solidity of the customer base
  • Reputation with customers
  • Good track record with employee relations

How goodwill is calculated

There are three ways of calculating goodwill in the UK. 

The first method to determine goodwill is the simple/multiple approach which tends to apply to owner/manager companies. Goodwill is valued using a multiplier against the maintainable profits figures once the owners’ salaries have been deducted. 

The multiplier is determined based on factors such as the business’s growth and profitability over a set period of time.

Another way is the whole company approach. This is a common method of valuing a business and takes into account all tangible and intangible assets of the company as a whole. If the valuation is more than the net value of the assets then this is goodwill.

The final way is by calculating goodwill through turnover. Most commonly used when valuing practices of accountants or solicitors, a multiplier is applied to professional fees, and the levels of business growth can range depending on the type of clients in each practice.

Potential issues with goodwill 

There are some certain drawbacks when it comes to calculating goodwill, especially when it comes to selling your business. As acquisitions of businesses tend to factor in future cash flow and profits, it can be hard to accurately forecast these figures and will make it hard work to come up with a fair price against the current assets.

While there is positive goodwill, there’s also negative goodwill. If someone buys your company for less than the net market value it will indicate you’re selling due to financial difficulties and need to sell assets at a fraction of their worth. Negative goodwill is essentially always in favour of the buyer.

Goodwill can be problematic for you if you’re selling a business, this is because each business is different and the calculations made can be very subjective. If an accountant calculates the value of your assets or business against a similar business then you could miss out on some money from the sale.

What to do next

Selling your business can be a stressful experience, especially if you’re unsure if you’re getting a fair price for it. By getting in touch with the team at Dunkley’s, you can be sure you’ll get the best advice when it comes to parting with your business.

Talk to us about your business valuation.

What can we do for you?

If there’s anything you’d like to know about Dunkley’s, we’d love to hear from you.