Topic for Discussion: How do I know how much goodwill my company has?

Answer: That's a tough one. It's obvious to us that the value of the business we own exceeds the value of our assets less our liabilities. In other words, the equity section of your balance sheet, which equals all your cash, receivables, inventory, equipment and other assets, less the amounts you owe your vendors, the bank, and any other liabilities, does not represent the value of your business.

Topic for Discussion: Where is the goodwill in your business?

Answer: Goodwill is in lots of places, your customer relationships, your employees, the reputation of your business. All of these are sources of goodwill. These sources are what make your business more than a collection of assets.

Because of the goodwill elements, you are able to make money and because you make money, you are attractive to a buyer. The valuation of that goodwill is the toughest part of the determination of the fair price to be paid for your business.

Topic for Discussion: If goodwill is an asset, why doesn't my CPA put it on my books?

Answer: Financial statements are prepared in accordance with "GAAP", Generally Accepted Accounting Principles. GAAP requires that all assets be recorded at cost, not to exceed net realizable value. That "not to exceed" caveat is why you record depreciation of long-term assets, to reflect the wear and tear of the assets. The buyer of your business will record goodwill, to the extent and in the amount that the purchase price exceeds the value of the assets acquired less the liabilities assumed.

You think about it: What do customers think of you right now? Can their good feelings toward you translate into goodwill for a business valuation? If customers don't think well of you, what should you do to get them to think well of you?