Goodwill is the value of intangible assets that don’t have an easily defined valuation. It is easier for a buyer and seller to determine the valuation for a piece of machinery or a fleet of vehicles. How do you go about valuing your client list? Trademarks? Brand name? These are more difficult figures to pin down.

Why Goodwill is Important

Business owners know that value cannot be defined only by tangible assets. An auto manufacturer cannot be valued by finding the sum of the values of machinery, raw materials, plants, and property. Intangibles also contribute to profitability and should be considered in acquisition.

Goodwill is important because it helps to minimize the risk that a business will stumble after a change of ownership. Certainly, some changes take place after an M&A transaction, but a business with a solid customer list, IP, and other intangibles should continue to operate as it has done historically.

A variety of factors can be considered goodwill including, but not limited to:

• Copyrights, trademarks, patents
• Brand name
• Reputation
• Customer and supplier lists and relationships
• Contracts
• Proprietary software and know-how
• Trade secrets and recipes
• Customized databases

Let’s look at a few of the above to better understand how they play into goodwill.

Customer/Supplier Lists and Reputation

Any prospective buyer is going to want to see that the business can be maintained after the transaction. If a situation arises where the owner exiting would tank the business, many buyers aren’t going to take a second look. Ideally, you would be able to show that your business has a customer list that will allow the buyer to forecast recurring revenues. For example, if I’m selling a pool cleaning business and I can demonstrate that I have a book of business with clients who have been loyal over several years, a buyer can project what types of revenues to expect in the future.

Brand name, trade secrets, trademarks, and patents

A strong brand name can be very attractive to a would-be buyer. This is because a strong brand name will attract customers. If consumers recognize the brand as being high quality, fun, or providing reasonably priced products/services a buyer will want to be sure they can continue to use the name. Think about Apple, Inc. Just say “Apple” and people will start to have an image of a specific type of product and experience. If you were to consider a purchase of Apple, Inc., but the name wasn’t included, would you be willing to go through with the purchase? Likely not.

Databases and Proprietary Software

Let’s examine the pool cleaning business mentioned above. The business likely has a database with customer data. As many of us know, knowledge is power and data is a stepping stone to knowledge. Leveraging the data in the database, a buyer could identify customers who may be good targets for additional services. If the database includes email addresses the buyer could initiate an email marketing campaign when running promotions or deliver useful messages on pool care in various seasons.