Goodwill is the additional value that accrues to an enterprise that uses its assets in such a way that the assets collectively yield higher results than would be returned by the same assets operating individually. Goodwill is calculated as the difference between enterprise value calculated as a multiple of operational results and enterprise value based on only the fair market value of net tangible operational assets. Goodwill is seldom shown on the balance sheet but is frequently the most important asset of the business.
Goodwill may arise for several reasons, chiefly a company’s presence in its market and the prospect of continued profitability as an enterprise.
Goodwill is where the true entrepreneurial value of a business lies. It demonstrates the ability of the enterprise to generate elevated yields through a superior collective use of its assets.
A LACK of goodwill may result from several factors:
- the company is under-performing (could be for a variety of reasons)
- there is no assured continuity of sales
- the company is overly dependent on key employees, key customers, or key suppliers
- net assets are higher than they need to be for the current level of business
- a combination of all the above or other factors
Goodwill is not always transferable; it could be personal, transferable, or conditionally transferable. These issues are discussed in future posts.
Contact MVI for assistance in understanding the how goodwill arises and the extent to which it is transferable.