The Art of Business Valuation

CHAPTER 10Goodwill and the Small Business

In small and very small business valuation, goodwill is often used as the general classification for all intangible assets. Calculating goodwill is fairly straightforward. Goodwill is the residual when subtracting all physical assets value from the total business value. Goodwill in its broadest sense is the value attributed to all business assets and activities other than the physical assets.

There are many potential classifications of intangible assets. These include licenses, intellectual property, such as patents, copyrights, trademarks, trade secrets, and the like. There are intangible assets associated with the customer list and relationships with suppliers, contractors, and the like. These can all be broken down and estimated. The Generally Accepted Accounting Principles (GAAP) require this for larger companies but these estimates are rarely if ever done for small and very small businesses. With small and very small businesses, intangible assets are not further broken down except when there are reasons to determine personal goodwill and company goodwill.

In many jurisdictions for divorce, and in some federal tax matters including when C corporations are sold in asset sales, and for estate and gift tax, personal goodwill can be very important to determine.

In many states, in divorce, personal goodwill is a personal asset and not part of the marital estate. For federal tax purposes, if a C corporation is being sold in an asset sale, ...