Does a Business Valuation Include Goodwill and Intangible Assets?

Key Takeaways

• A properly prepared business valuation generally captures goodwill and intangible value, but how it is reflected depends on the valuation approach and the purpose of the engagement.
• Goodwill is the value that remains after identifiable tangible and intangible assets are accounted for. It typically reflects earning power above a fair return on the company’s assets.
• Identifiable intangibles, such as trademarks, customer lists, contracts, software, and non-competes, can be separated and valued individually. Goodwill is the unidentifiable residual.
• Goodwill can be personal (tied to the owner) or enterprise (belonging to the business). The distinction matters in divorce, partner disputes, and transaction tax planning.
• The purpose of the valuation, whether estate or gift tax, SBA financing, an ESOP, a partner buyout, or litigation, shapes how intangible value is identified, supported, and disclosed.

When business owners think about what their company is worth, they usually start with what they can see: equipment, vehicles, inventory, real estate, the cash in the bank. That instinct makes sense. Tangible assets are easy to point to and easy to count.

But in most operating businesses, a large share of the value lives somewhere less visible: in customer relationships, reputation, recurring revenue, contracts, a trained staff, and the earning power the company built over time. Those things rarely sit on a balance sheet, yet they often drive what the business is actually worth.

That is the territory of goodwill and intangible assets. And yes, in most business valuations they are part of the conclusion. The more useful question is how they get there, and why the answer depends on why the valuation is being prepared in the first place.

What Goodwill Actually Is

Goodwill is one of those terms owners hear constantly but rarely see defined well. In valuation terms, goodwill is the value of a business that remains after you account for its identifiable assets, both tangible and intangible, net of liabilities. Put simply: if a profitable company is worth more than the sum of its identifiable parts, that remaining value is goodwill.

Goodwill is usually a function of earning power. A business generates goodwill when it earns more than a fair return on the assets it has invested. That excess return, produced by reputation, customer loyalty, market position, efficient systems, and a capable team, is what goodwill represents.

Common contributors to goodwill include:

• a recognized brand and strong market reputation
• loyal customers and recurring revenue
• dependable, predictable earnings
• efficient systems and processes
• a team that performs without constant owner involvement

The common thread is economic: these factors matter to value because they support earnings that exceed what the hard assets alone would justify.

Identifiable Intangibles vs. Goodwill

Here is a distinction that trips up many owners, and even some advisors: not all intangible value is goodwill.

Many intangible assets are identifiable, meaning they can be separated from the business and valued on their own. These include:

• trademarks and trade names
• customer lists and customer relationships
• patents, copyrights, and other intellectual property
• proprietary software and technology
• licenses, permits, and franchise rights
• non-compete agreements
• favorable contracts and leases

Goodwill, by contrast, is what is left over: the residual value that cannot be tied to a specific identifiable asset.

In most everyday valuations of an operating business, this distinction stays in the background. The company’s total intangible value is captured through its earnings and is not broken out asset by asset. But in some engagements the distinction becomes central. The clearest example is a purchase price allocation following an acquisition, where identifiable intangibles must be recognized and measured separately from goodwill on the buyer’s books. In those cases, goodwill carries a precise, residual meaning, and lumping everything together would be incorrect.

Personal vs. Enterprise Goodwill

There is a second distinction that carries real consequences: whether goodwill belongs to the owner or to the business.

Enterprise goodwill (sometimes called commercial or business goodwill) attaches to the company itself. It comes from things that survive the owner’s departure: the brand, the location, the systems, the contracts, the staff, the recurring customer base. Enterprise goodwill is transferable.

Personal goodwill attaches to the individual. It comes from the owner’s personal reputation, relationships, skill, and presence. If customers follow the person rather than the business, that is personal goodwill, and it generally walks out the door when the owner does.

This is not an academic point. The distinction can be decisive in several settings:

• In divorce, many states exclude personal goodwill from the marital estate while including enterprise goodwill, so how goodwill is characterized can move the number materially.
• In a partner buyout or shareholder dispute, the same question often determines what a departing owner is owed.
• In a business sale, personal goodwill can sometimes be sold separately by the owner, with meaningful tax consequences, an issue the courts have addressed in cases such as Martin Ice Cream and Bross Trucking.

A valuation that ignores this distinction can produce a defensible-looking number that falls apart under scrutiny, particularly in litigation.

How the IRS Looks at Goodwill

For tax-related valuations, the framework traces back to Revenue Ruling 59-60. Issued decades ago, it remains the foundational guidance for valuing closely held businesses, and it explicitly recognizes goodwill and other intangible value among the factors that must be considered. The ruling treats goodwill as resting primarily on earning capacity and describes its value in terms of the earnings a business produces above a fair return on its net tangible assets.

When goodwill needs to be isolated and measured, Revenue Ruling 68-609 supplies the classic approach: the excess earnings method, sometimes called the formula method. In broad terms, it applies a reasonable rate of return to the company’s tangible assets, treats earnings above that return as attributable to intangibles, and capitalizes that excess to arrive at a goodwill value. The ruling positions it as a method to use only when no better basis is available, but it remains widely applied in estate, gift, and divorce work.

How the Valuation Approach Affects the Treatment

How goodwill shows up depends heavily on which approach the analyst uses.

Income approach. Under an income-based method, goodwill and intangible value are built directly into the company’s earning power. If reputation, customer loyalty, and proprietary strengths drive strong, sustainable cash flow, that value flows through to the conclusion via the company’s earnings, without being itemized.

Market approach. Under a market-based method, intangible value is reflected indirectly through the multiples that comparable companies command. If the market pays more for businesses with sticky revenue or strong brands, that premium is embedded in the multiple.

Asset approach. This is where care is needed. A straightforward adjusted-net-asset-value analysis restates identifiable assets and liabilities to fair value and, on its own, may not capture the going-concern value of a profitable business whose worth comes from earnings rather than hard assets. That said, the asset approach can incorporate goodwill, for instance by adding a capitalized excess-earnings component to adjusted net assets. The key point for owners: do not equate book value, or even adjusted book value, with what a profitable operating business is worth.

Why the Purpose of the Valuation Matters

This is the part owners most often miss. There is no single value of a business. The standard of value, the level of value, and the required level of support all shift with the purpose of the engagement, and goodwill sits right in the middle of that.

Estate and gift tax. When a closely held interest is transferred or included in an estate, its fair market value, goodwill and all, is what gets reported, applying the Revenue Ruling 59-60 framework. Enterprise goodwill is generally includible; personal goodwill raises harder questions. These valuations need to withstand IRS scrutiny, so the support behind any intangible value matters.

SBA-financed acquisitions. When a buyer finances a business purchase through an SBA loan, much of the purchase price often exceeds the value of the tangible assets, and that excess is goodwill. Once goodwill crosses the SBA’s threshold, the lender is required to obtain an independent business valuation from a qualified source. Here, goodwill is not just a concept; it is the trigger for a formal appraisal requirement.

ESOPs. When a company is sold to an employee stock ownership plan, an independent trustee must ensure the plan pays no more than adequate consideration. The appraisal supporting that conclusion captures the company’s full enterprise value, including its intangible value, and it carries fiduciary and regulatory weight under ERISA.

Partner buyouts and litigation. When an owner exits or a dispute lands in court, goodwill, and especially the personal-versus-enterprise question, frequently becomes the central battleground. The characterization can change the outcome.

The takeaway: the same company can carry different, equally correct values depending on why it is being valued. Goodwill is often where those differences live.

Common Misconceptions

A few patterns come up again and again.

“Value equals hard assets.” Focusing only on what the company owns understates a business with strong, transferable earnings.

“Reputation automatically means a premium.” Reputation adds value only when it supports earnings that are likely to continue, and when it belongs to the business rather than just the owner.

“Every intangible gets its own dollar figure.” In most operating-business valuations, intangible value is embedded in the overall conclusion, not carved out line by line. Separate identification is the exception, driven by purpose.

“Book value is value.” Goodwill, by definition, lives above book value, and even adjusted book value can miss it.

“Owner-dependent goodwill is still company value.” If the goodwill walks out with the owner, a buyer or a court may treat it as personal rather than enterprise, and discount it accordingly.

How to Think About Your Own Business

A more useful question than “Do I have goodwill?” is this: what is creating value in my business beyond its hard assets, and would that value survive my departure?

If the answer points to recurring revenue, durable customer relationships, a recognized name, transferable contracts, efficient systems, and a team that performs without you, you likely have meaningful enterprise goodwill. If it points mostly to your own relationships and presence, some of that value may be personal, which matters enormously depending on what you are planning.

Understanding that early leads to better planning, more realistic expectations, and a valuation that holds up when it counts.

Frequently Asked Questions

Does a business valuation include goodwill?

Generally yes. When a business is worth more than its identifiable assets net of liabilities, usually because of earning power, reputation, or customer relationships, that excess is goodwill, and a properly prepared valuation captures it.

What is the difference between goodwill and intangible assets?

Identifiable intangible assets, such as trademarks, customer lists, contracts, software, and non-competes, can be separated and valued individually. Goodwill is the residual value that remains after those identifiable assets are accounted for.

What is the difference between personal and enterprise goodwill?

Enterprise goodwill belongs to the business and is transferable. Personal goodwill belongs to the owner, including their relationships, reputation, and skill, and generally leaves when the owner does. The distinction is often decisive in divorce, partner disputes, and tax planning.

Are intangible assets always valued separately?

No. In most operating-business valuations, intangible value is reflected in the overall conclusion through earnings or market multiples. Separate identification is typically driven by the purpose of the engagement, with a purchase price allocation being the clearest example.

Why does goodwill matter differently depending on the situation?

Because the standard of value and the required level of support shift with the purpose. Estate and gift tax, SBA financing, an ESOP, a partner buyout, and litigation each treat goodwill differently. The same company can carry different, equally correct values depending on why it is being valued.

About BGH Valuation Services

BGH Valuation Services prepares independent business valuations and equipment appraisals for estate and gift tax planning, SBA financing, ESOPs, partner buyouts, and litigation. If you need a defensible value that properly accounts for goodwill and intangible assets, we can help. Contact us!