How to Value Goodwill When Selling a Business

Business Seller has goodwill: When Selling a Business: Key Steps & Considerations

Understanding and valuing Goodwill is a crucial step when selling your business, as it can increase the overall value of your sale.

What Is Goodwill?

Goodwill is any NON-TANGIBLE asset that’s directly tied to the cash flow of the business. It’s valued at a multiple of the cash flow.

Examples of Goodwill

Perhaps the simplest way to convey the concept of goodwill is to illustrate it by example.

As long as the following examples directly increase cash flow, below are some examples of what could be considered Goodwill:

  • High-traffic location
  • Customer mailing lists
  • Exclusive contracts and relationships with quality suppliers
  • Proprietary assets like formulas, technologies, systems, and designs

When Goodwill Doesn’t Apply

A restaurant on the busiest street corner has a giant sign, and everyone knows this restaurant. The revenue is nothing special, and there is almost no profit, while the seller may think it’s worth millions. The business itself is not worth much. If the real estate is also included, that would be reflected in the R.E. value.

Determining the goodwill value of your business can be tricky, and you don’t want to risk short-changing yourself, which is why it’s recommended that you work with a professional broker.

Additional Intangible Assets That Could Be Considered For Goodwill

As long as they’re tied to cash flow, other intangible assets you may have in your business are licenses, trade names, quotas, copyright, trademarks, franchise, and brands.

Organizing a Business Deal While Considering the Value of Goodwill

If you’re selling your business and want to find a buyer who will consider the value of goodwill, consider working with a broker who has considerable experience with securing beneficial deals for customers.

At Sunbelt Business Brokers, we take the time to pre-screen buyers and collect a Buyer Profile and personal financial statement from each interested party. This benefits you as a seller, as it qualifies a buyer before you enter into a contract with them.

Working with professionals like those at Sunbelt is especially important as a seller since they’re the one who benefits if the majority of the sale is considered goodwill. Goodwill is taxed at the long-term capital gains tax rate which has a lower threshold from the ordinary income tax rate. This doesn’t hurt the buyer either. Once the buyer and seller agree on what is considered goodwill, their tax returns need to match so they’re not subject to an audit.

Asset Allocation

Asset allocation is another important aspect of selling your business. This procedure typically takes place at closing.

In a sale structured as an asset sale, the general principle is that the purchase price of your physical assets should be allocated based on current fair market value. The Broker will negotiate the purchase price allocation for these assets, so neither party is disadvantaged by the sale.

Using Sunbelt to Successfully Sell Your Business

Sunbelt markets over 200 business for sale portals, and we spend a lot of money marketing your business for sale, which is why we are so selective about the listings we present.

We offer custom deal structures, dedicated financial advisors, and compelling marketing assets that get our customers the best price for their business. Sunbelt takes the time required to pre-screen every buyer by establishing a profile and receiving a Personal Financial Statement (PFS). Because we do the original legwork, you get a head start on selling your business. Contact Sunbelt Business Brokers of Naples for a free valuation and consultation.