Zeroing in on Goodwill

By Michael D. Rubin, CEO & Founder · Updated September 2026 · 738 words

Goodwill is the part of a company's price above the value of its identifiable tangible assets: the premium a buyer pays for reputation, loyal customers, relationships, know-how and the expectation that the business will keep earning. For many profitable service and distribution companies, it makes up a large part of the price.

The idea is simple even if the accounting is not. Goodwill exists when a company is recognized as a real, functioning business with staying power in its market, and a buyer is willing to pay for that staying power.

What goodwill is made of

• Reputation with customers, suppliers and the wider industry.
• A loyal customer base, especially one that buys repeatedly or under contract.
• Good relationships with suppliers, including dependable supply and fair terms.
• The quality and track record of management.
• A trained workforce and specialized know-how.
• Name or brand recognition, trademarks and other registered rights.
• A strong position in a healthy local or regional economy.

Reputation: easy to see, hard to price

Imagine two companies that are nearly identical in size, services and profit. One is known for excellent service; the other for missed appointments and unhappy customers. Almost every buyer chooses the first, and pays more for it. Yet neither company's balance sheet shows the difference.

That is the challenge with goodwill. Its most important elements are not recorded anywhere as assets, so a seller has to show them through evidence: retention figures, reviews, repeat business, supplier references and the tenure of key people. A buyer that can see the goodwill working is far more willing to pay for it.

Goodwill that transfers, and goodwill that leaves with you

Not all goodwill belongs to the company. Some of it may be personal: relationships, skills or reputation attached to the owner rather than the business. Personal goodwill is valuable to the owner but a risk to a buyer, because it may walk out the door at closing. Buyers respond by lowering the price, extending the owner's transition period, or making part of the price depend on results.

The distinction can also matter for taxes and deal structure, which is a question for your CPA and transaction attorney. The practical step for an owner is to move goodwill from personal to company over time: introduce managers to key customers, put relationships under the company name, and document the know-how. Our answer on reducing owner dependence before selling a service business sets out how.

Start early. Customers who have dealt only with you for twenty years will not transfer their loyalty in a thirty-day handover. A year or two of working alongside a capable manager, with the manager handling more of the relationship each quarter, is what convinces a buyer the goodwill will stay.

Why goodwill counts for more than it once did

For much of the last century, many large companies were built around factories, heavy equipment and physical inventory, and value was closely tied to those assets. Over recent decades the balance has shifted toward intangible assets: brands, customer relationships, software, trained people and intellectual property. Accounting rules for goodwill have changed along the way, and the concept has become broader and more complex.

For a lower-middle-market seller, the lesson is practical. A company with modest physical assets can still command a strong price if its goodwill is real, transferable and well documented.

Making goodwill visible to buyers

Goodwill is best presented as a story backed by numbers. Show how long customers stay, how many come back, how new customers find you, and how the team delivers consistently without the owner. Tie the company's reputation to things a buyer can check. That evidence supports a higher multiple on earnings, which is where goodwill actually shows up in the price. Through our sell-side representation, that story is built into the marketing package and video buyers see.

Be specific. A claim that customers love the company carries little weight; a record showing that most service-agreement customers renew each year, with the names and dates to back it up, carries a great deal.

How MDR & Associates values goodwill

We look at goodwill through the earnings it supports and the risk that it might not transfer, and we reflect both in a free, confidential opinion of value after reviewing three years of financials. If you need a formal allocation or written report, our business valuation service provides one separately. For a first range, request a free valuation snapshot.

Where this fitsBusiness valuation in Texas →

Questions owners ask next

Is goodwill taxed differently from other parts of the price?

How the price is allocated among goodwill, equipment, non-compete agreements and other assets can change the tax result for both seller and buyer. The allocation is negotiated and documented in the purchase agreement. Your CPA and transaction attorney should model the options before you agree to terms.

Can a business with little profit have goodwill?

It can have a good reputation, but buyers pay for goodwill mainly through earnings. If the company does not turn its reputation into steady profit, a buyer has little reason to pay much above the value of its assets, however well known the name.