Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

October 9, 2011

How Do You Measure Goodwill?

By Joseph Eneldas


We are often asked by clients how we assess Goodwill.  “It must be the most frequently raised issue in the valuating process,” says Achim Neumann, President of A Neumann & Associates, New Jersey, “and indeed from an owner’s perspective, several issues come into play, such as customer and vendor relationships, patents, employees, and so on.”

To understand the concept of Goodwill, it’s important to look at the methodologies used by various valuation companies to establish the value of a company as a whole. Once this is established the components can be broken down.

Typically, a company is valued by a multitude of factors, which can be roughly grouped into balance sheet-based and income statement-based categories. Or more specifically, asset-based and cash flow-based. If the cash flow-based valuation is less than the asset-based valuation, the owner is usually better off liquidating the company’s assets than selling the company as an ongoing concern (setting aside for a moment the discount effect for selling the assets).

“However, generally, the cash flow based-valuation, based on several different methods of assessing cash flow, will exceed the asset-based valuation. In other words, there is a “premium” above the assets, or the Goodwill.” says Neumann.  “Specifically, if the cash flow-based valuation arrives at a value of, say, $6.3m, but the (tangible) assets are $3.9m, then the resulting Goodwill is $2.4m.

One concern business owners have is why there is no Goodwill even though the company has various assets that the owner considers to be Goodwill, such as a customer list, software programs and so on. “Realistically, a buyer will only attribute Goodwill to these assets if they produce cash flow, now or in the future,” says Neumann, “and the focus here is more on ‘now’. But, there are certainly also exceptions, for example, patents or inventions that will create significant cash flows in the future.”

Another issue frequently expressed is the comparison of ratios and Goodwill between a midsized, privately held company and publicly held companies. As a very rough rule of thumb, a price/earnings valuation of privately held companies is close to half of publicly held companies in a similar industry or market sector.

Finally, there is Uncle Sam. “Once there is an agreement between the buyer and seller of a company, it will be important tax wise as to how the Goodwill is allocated,” says Neumann, “as the depreciation rates differ among different asset classes, and consequently, this will have an impact on the future owner’s cash flow.”

Naturally, there are conflicting interests. A buyer prefers to deduct as much upfront as ordinary deductions resulting in ordinary income for the seller; whereas a seller prefers an allocation to capital gain property, which allows a buyer to recover only through tax deductions over 15 years.

Under Section 197 of the IRS code, the balance of the purchase price (aka ‘Goodwill’) which cannot be assigned to cash, receivables, inventory or fixed assets, has an amortization period of 15 years and is considered to be a capital gain to the seller. Goodwill is the value of the business above the asst value, and is based on expected continued customers due to its name, reputation or any other factor.

In sum, given the large number of business transfers and valuations, there is a significant knowledge base with respect to Goodwill and the respective proper treatment in the business transfer process. A Neumann & Associates has advised many business clients in the past ten years to find an optimal solution for both parties and has appropriate experts available to further address issues in this complex arena.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or

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Client Testimonials

“I had been in touch with Karin and Gary from A Neumann & Associates regarding some opportunities and was looking forward to meeting with them. Hence, when they organized a seminar in Princeton, NJ, I was quick to sign up. The seminar was very informative as the team walked the attendees through various scenarios and referenced real life buying/selling situations they had been through. The sessions by Gary, Karin and Achim were crisp and focused and brought clarity to potential seller and buyers. I strongly recommend the team and look forward to continue working with them.”

Gaurav Tyagi

“Thank you for your Event on "How to value, Sell, and Buy A Business for Maximum Profit" and the insight into ANA’s approach on what is involved in the Business Exit for sellers. Garys Hervieiou's "Business Valuation", Achim's "Deal structure" presentation and Karin’s "Preparing the Package" are real street knowledge shared. They answered attendees questions which makes it more interesting for learning from others. Great for small businesses like us. The presentations were totally worth our time and travel for the event to Princeton, NJ from Rockville MD. Ravi Bhutani, President, CIPS”

Ravi Bhutani

“Gary, this is to thank you for an excellent job done in selling our business. We could never have done it without your professional expertise, dedication and time put in without reservation to make it happen. We will gladly and highly recommend you to anybody in our position.  It was a pleasure to work with you.”

Pat Iammatteo, Owner

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Eric H., Investor

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

Double Diamond

“Used A Neumann & Associates to sale my business. could not imagine having done it with out the patience and experience Gary provided. Thanks Gary,”

Dennis Frazier

“Working with Marc and his company was a pleasure. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. Marc handled most of the interaction and he has one of the greatest demeanors. Again, it was a pleasure working with him and his firm.”

Douglas DiCeglio

“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs
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If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

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