Goodwill

Goodwill is the value of a business in excess of the fair market value of its identifiable net assets — it represents intangible factors such as customer relationships, brand reputation, workforce quality, proprietary processes, and market position that make the business worth more than its physical and financial assets alone.

Goodwill is calculated by subtracting the fair market value of net tangible assets (physical assets minus liabilities) from the total enterprise value of the business. For example, a business valued at $2 million with $300,000 in net tangible assets has $1.7 million in goodwill.

In Canadian professional services practices (law firms, accounting practices, medical clinics), a distinction is drawn between enterprise goodwill — attached to the firm itself and transferable to a new owner — and personal goodwill — attributable to the individual professional's personal relationships and reputation, which may not survive ownership transfer. This distinction has significant tax and valuation implications.

Since January 1, 2017, purchased goodwill is treated as Class 14.1 depreciable property under the Income Tax Act, amortizable at 5% declining balance for tax purposes.

See also: Enterprise Value, Business Valuation, Fair Market Value, Asset Sale, Intangible Assets.