This is often a prospective buyer's first response when given the price of a seller's business. This is especially true today when many excellent and profitable businesses have few hard or physical assets. For years, buyers, and even business appraisers, have called the difference between the actual physical assets and the asking price "blue sky." Goodwill has often been a prime force behind the blue sky concept, and it is one of the reasons a potential buyer might feel that the seller is asking an "arm and a leg" for a business for sale.
Today's goodwill is more than just the hard work and effort a business owner has put into building the business. The Web site name alone may be worth a lot of money. Think "Google," which by now may have achieved the same name recognition as Kleenex. The technology behind the name has a lot of value, but it's important to remember that the name recognition or brand name, known all over the world, is also where the big bucks lie.
How does this relate to goodwill? The goodwill of a business can include patents, copyrights, its Web site and/or domain name, licenses, trademarks, proprietary software, secret recipes (consider the value of the secret recipe for Coke), royalties - the list goes on and on. Would a McDonald's business, assuming the same sales and profit, have the same value if the name and franchise were not included?
Buyers need to realize that much of the value of a business in today's world is not to be found in the hard assets such as the fixtures and equipment, but in the intangibles that create the income. Take the McDonald's just mentioned. It may have beautiful stainless steel equipment, but the equipment is only worth the income it can produce; and to take it a step further, there are warehouses in every major city in the country full of "for sale" stainless steel equipment. The real value is the name and what it represents to the dining public.
For those who are considering selling a business, steps should be made to ensure that the goodwill is protected and transferable. For those who are considering buying a business, they need to know that in many cases, what they are really buying is the goodwill of the business.
