When valuing a business an intangible asset exists: goodwill. While you don’t see or touch goodwill, it exists in many businesses, especially businesses with longevity. Goodwill may incorporate the customer loyalty built by the business, but in today’s world, goodwill also includes valuable properties such as favorable government contracts, copyrights, patents and even domain names of considerable value. All these things increase the potential earning power of the business and must be accounted for when setting the value of a business.

Of course sellers want payment for the goodwill built into their business. Unusual or lucrative copyrights and patents which make the business unique or simplify processes certainly offer value to the buyer. Sellers should carefully explain the value of these intangible assets since buyers tend to place value only on tangible assets. The buyer considers the cost of starting his own business when valuing an existing business. So if a good portion of the price of an existing business involves goodwill, the buyer must understand why the existing business provides a better opportunity.

The bottom line: Both sellers and buyers should be aware of goodwill. The buyer should understand the value of these intangible assets. The seller should carefully value goodwill so that it offers a realistic value for the price.