March 2025
“Goodwill” is defined by the International Valuation Glossary - Business Valuation as “An Intangible Asset which represents any future economic benefit arising from a business or a group of assets which is not individually identified or separately recognized. Goodwill can arise as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified. In the context of a business combination, goodwill is measured as the difference between (A) the aggregate of (i) the value of the consideration transferred (generally at Fair Value), (ii) the amount of any noncontrolling interest, and (iii) in a business combination achieved in stages, the acquisition-date Fair Value of the acquirer’s previously held equity interest in the acquiree, and (B) the net of the acquisition-date amounts of the Identifiable Assets acquired and the liabilities as assumed.”
Goodwill of a business needs to be valued in a number of situations including an acquisition, marital dissolution, estate tax, gift tax and financial reporting. The value of goodwill can be different depending on the purpose of the valuation.
According to the International Valuation Standards, there are three valuation approaches to valuing intangible assets such as goodwill. The approaches are: 1) market; 2) income; and 3) cost.
Under the market approach the value of goodwill is determined by comparison to sales of goodwill. However, the amount of data on such sales is limited. When adequate data is available the value of the goodwill should reflect the difference between the subject and the comparable transaction.
Under the income approach (which is the most often used approach to value goodwill) goodwill is valued by capitalizing forecast earnings over the life of the goodwill. However, it may be difficult to separate earnings generated by the goodwill from those generated by other assets. The income approach includes a number of methods including relief from royalty, excess earnings and cost saving.
The relief from royalty method involves determining a reasonable royalty rate as if the goodwill were licensed, usually expressed as a percent of revenues. The present value of the forecast royalties is calculated at a reasonable discount rate. The excess earnings method involves capitalizing earnings attributable to the subject goodwill after excluding earnings from the other assets assuming reasonable rates of return on those assets. The cost saving method calculates the present value of the cost savings generated by employing the goodwill.
The cost approach (which is normally used only when other approaches cannot be used) involves estimating the cost to replace or reproduce the goodwill.
To summarize, goodwill is an intangible asset. There are three approaches to valuing goodwill and there are a number of methods under the approaches. The income approach is the most used approach to value goodwill. The choice of which approach and method to use depends largely on the quality and quantity of data available.
Relevant Court Cases
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Gillum v. Gillum,
Arkansas Court of Appeals,
No. CV-23-743,
Opinion delivered February 19, 2025
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Petersen v. Petersen,
Supreme Court of the State of Alaska,
No. S-18642,
Opinion delivered March 14, 2025
Recent Business Valuation Articles
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“The Role of Intangible Assets
in Shaping Firm Value,”
by Feng Dong and John A. Doukas
dated March 8, 2025
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“The Role of Intangible Resources
in Driving Value Creation and Sustained
Competitive Advantage for Businesses,”
by Sebastian E. Stan, Aurel M. Titu and
Christian Paraschiv,
posted February 18, 2025
Recent Engagements
- Valuation of the common
stock of a manufacturing and
distribution conglomerate for
purchase/sale purposes.
- Consulting regarding 100%
of the shareholder equity of a
custom metal and structural
fabrication company on a
controlling interest basis
for marital dissolution purposes.
- Valuation of limited partnership
interests of a real estate holding
company on a minority interest basis for
gift tax reporting purposes.
- Consulting regarding 100% of
the common stock of a niche
manufacturing equipment sales
company on a controlling interest
basis for corporate financial
planning purposes.
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