What is goodwill, why should we pay for it and is it worth buying a business with goodwill?
Goodwill is the value of a business over and above the value of its assets. Say a snowplowing company owns a plow worth $5000, but you pay $10,000 for the business. The extra $5000 is for goodwill – the name of the business, its reputation, etc. It is worth paying for if the goodwill can transfer to you, but it sometimes doesn’t – for example, if you were a dentist taking over another’s practice, you would pay much less for goodwill because it is directly tied to the reputation of the preceding dentist – when he leaves, so too does most of the goodwill. As always, if you are thinking of buying a business take its books to an accountant, who should be able to give you a decent estimate as to how much you should pay for its goodwill.
