What is Goodwill?

Goodwill represents the non-physical assets of a business that contribute to its value. Think of it as the premium a buyer pays for a business above the fair market value of its identifiable assets like equipment, inventory, and real estate. This premium is often due to factors that are hard to put a finger on, but clearly add value, such as a strong brand name, a loyal customer base, good employee relations, or proprietary technology. It’s essentially the value of the business’s reputation and future earning potential that isn’t tied to a specific physical item.

Goodwill matters because it often makes up a significant portion of a business’s total value, especially for service-based or brand-driven companies. For sellers, understanding goodwill helps you justify a higher asking price. For buyers, it’s important to recognize what you’re paying for beyond the tangible assets and how those intangible factors contribute to future profits. It’s a key component in how businesses are valued and acquired.