Many business owners don't know what goodwill is or how to determine it properly. Goodwill is when a buyer is willing to pay a price above the company's net tangible asset value. Goodwill is also often referred to as "blue sky". Every business can benefit from learning how to build goodwill and putting those ideas into practice.

What does Goodwill mean?

Goodwill refers to the intangible value of a business above it's fair market value of tangible assets. Goodwill can be as simple as your company having an exceptional reputation in the market place which would usually be accompanied by experienced employees, loyal base of customers, established vendor network etc. Goodwill can sometimes come in the form of technology, systems or processes that have been implemented. Goodwill can also come in the form of intellectual property (trademarks, registrations and/or patents filed with the USPTO) or domain names that people want to use. But, as you might expect, it's can be difficult to put a price on these kinds of assets. Goodwill can be subjective in buyer's and seller's eyes, but there is a mathematical approach to properly determining goodwill and as you might expect it's for tax reasons. Goodwill is almost always what's "left over" on the allocation table. An allocation table is a disclosure in the definitive purchase agreement where the buyer and seller mutually agree as to how the purchase price will be allocated to the assets being transferred for tax purposes. There are seven classes of assets for tax purposes. Here's what a typical purchase price allocation looks like:

• Furniture, Fixtures and Equipment : $167,500
• Non-Compete Agreement : $10,000
• Inventory : $232,500
• Real-Estate : $900,000
• Goodwill : ???