What is Goodwill (Business Valuation)?

Full Definition

Goodwill, in a business valuation or acquisition context, is the amount by which the price paid (or agreed value) for a business exceeds the fair value of its identifiable net assets -- broadly, tangible assets such as property, equipment and stock, plus identifiable intangible assets such as patents or customer contracts, minus liabilities. It represents value that cannot be pinned to a specific, separately identifiable asset but that a buyer is nonetheless willing to pay for, such as an established brand, customer loyalty and relationships, staff expertise, supplier relationships, or simply the expectation of future profits from an ongoing, proven operation rather than starting from scratch. Under UK and international accounting rules, goodwill arising on an acquisition is recognised as an intangible asset on the buyer's balance sheet and is then tested regularly for impairment (written down if its value has fallen) rather than amortised on a fixed schedule, which means a goodwill impairment can appear as a significant, sometimes headline-grabbing, non-cash charge in a set of company accounts if an acquisition underperforms expectations. When selling a small or owner-managed business, "goodwill" is often used more loosely to describe the gap between the sale price and the value of the physical assets being transferred, and how that goodwill value is agreed -- often based on a multiple of maintainable profits -- is frequently one of the most contested parts of business sale negotiations.

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