Goodwill: how it is valued
When a business is bought or sold, the price rarely coincides with the book value of the assets. The difference is called goodwill: it is the value of what does not appear on the balance sheet but makes the business earn — customer base, reputation, know-how, recurring contracts, market position. Understanding how it is estimated is decisive in every sale or acquisition.
What goodwill is
Goodwill is a company’s ability to produce profits higher than those that the invested capital alone would generate. A business with loyal customers, a recognised brand and recurring revenue is worth more than the sum of its machinery and its inventory. That “extra” is the goodwill.
In Swiss accounting, acquired goodwill (paid in a transaction) may be recognised as an asset and amortised, as a rule within a few years. Internally generated goodwill, on the other hand, is not recognised on the balance sheet: it emerges only at the moment the business is sold and the buyer pays for it.
Why it is difficult to value
Goodwill has no objective market price. It depends on future expectations and on qualitative factors. Two valuers can arrive at different figures starting from the same data. For this reason, rather than an “exact” number, the aim is a reasonable range, supported by method and by transparent assumptions.
The most used methods
In Swiss practice several approaches are usually combined:
- Discounted cash flow method (DCF): future flows are estimated and discounted at a rate that reflects the risk. It is the most conceptually sound method, but very sensitive to the assumptions.
- Multiples method: a multiple (of EBITDA, profit or turnover) observed in comparable transactions in the sector is applied. Simple and widespread, but the comparables must be chosen with care.
- Practitioners’ method (Praktikermethode): much used in Switzerland, it averages the earnings value (often double-weighted) with the net asset value. It offers a prudent and recognised reference.
- Excess earnings method: it isolates the profit exceeding the normal return on capital and capitalises it. It is the approach that most directly measures goodwill.
No method is “the true one”: a credible estimate comes from comparing several approaches and from an honest discussion of the differences.
What influences goodwill
The value of goodwill depends on concrete factors:
- recurrence of revenue: multi-year contracts and subscriptions are worth more than occasional sales;
- customer concentration: if a single client accounts for half of the turnover, the risk drives the value down;
- dependence on the owner: a business that works only thanks to the founder has goodwill that is difficult to transfer;
- quality of margins and their stability over time;
- robustness of processes, of the team and of the systems.
The mistake of dependence on the owner
This is the critical point for SMEs. If customer base, skills and relationships are tied to the person of the owner, the buyer risks paying for goodwill that vanishes on their exit. Preparing for the sale means making the business autonomous: documenting the processes, spreading the relationships across the team, reducing dependence on a single figure. It is the work that raises the real value even before sitting down at the table.
Tax aspects to consider
In a sale, the structure (sale of quotas or of the business, asset deal or share deal) has significant tax effects in Switzerland, both for the seller and for the buyer. The amortisation of acquired goodwill, the treatment of any capital gain and the taxation at cantonal level must be assessed case by case. A technically correct valuation without tax analysis risks leaving value on the table.
How we help you
At SIH ONE we support entrepreneurs and founders in business valuation and in sale or acquisition operations: choice of methods, analysis of flows, estimation of goodwill and tax structuring of the transaction. A well-done valuation is not a theoretical exercise: it is the basis on which a defensible price is negotiated.
Are you thinking of selling or acquiring a business? Talk to the Capital division.