Written on the 21 October 2013 by Queensland Government
There are 2 main ways you can go about calculating goodwill, but ultimately the value of goodwill is what the marketplace or a buyer is prepared to pay for it.
Valuing goodwill based on your required ROI
When you value goodwill based on your required ROI, it's the amount you'd need to invest to yield the super profit you've calculated.
Use the following interactive calculator to help you value goodwill. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see the value of goodwill based on your required ROI
In this example the valuation of the business's goodwill is $55,000. However, the valuation that's currently in the balance sheet may or may not bear any relationship to this figure. It is, however, the figure you would be willing to pay for it.
Note: To print this interactive goodwill calculator with your responses included, select File > Print (in the top navigation bar of your browser). If you select Print this page (below), you will print the calculator with the example shown.
Valuing goodwill based on the multiple method
Another method used to determine goodwill is the multiple method. This method is calculated using a multiple of super profit.
This multiple usually falls somewhere between 2 and 4 times the super profit and it varies from industry to industry and location to location. A common multiple is between 2.5 and 3 times the super profit.
In the example above the super profit is $11,000. If we assume that for this industry in this location the multiple would be 2.5, then the valuation of goodwill based on the multiple method would be $27,500.
The 2 methods of valuation usually yield different results, as in the example above. One method values goodwill at $55,000, while the other values it at $27,500.
In this case the difference might mean you're prepared to negotiate up to $55,000 with the seller. However, you could substantiate an opening offer of $27,500.
Valuing goodwill is a very difficult exercise and we've covered only some of the relevant considerations on this page. We strongly recommend that you work with an accountant to help you with this calculation in your own unique circumstances.