Q&A for How to Calculate Goodwill

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For a new small business, with a loss for the first year, would there be a value for the goodwill then, and how is this calculated?

Darron Kendrick, CPA, MA
Financial Advisor
Darron Kendrick is an Adjunct Professor of Accounting and Law at the University of North Georgia. He received his Masters degree in tax law from the Thomas Jefferson School of Law in 2012, and his CPA from the Alabama State Board of Public Accountancy in 1984.

Darron Kendrick, CPA, MA

Financial Advisor

Expert Answer

Unless a new business with an initial year loss is in a hot market, such as technology, or has some type of market edge or celebrity appeal, there would be little chance of finding goodwill.

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Question

How then does a startup calculate goodwill as a way of knowing the value of the startup?

Michael R. Lewis
Business Advisor
Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. He has a BBA in Industrial Management from the University of Texas at Austin.

Michael R. Lewis

Business Advisor

Expert Answer

There is no goodwill in a start-up balance sheet, since there was no cost to acquire the intangible asset. Goodwill exists *only* when a buyer pays more for an asset than the asset is worth, not before.

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Question

If the accounts of the firm are not real, than what has to done to arrive at Goodwill?

Darron Kendrick, CPA, MA
Financial Advisor
Darron Kendrick is an Adjunct Professor of Accounting and Law at the University of North Georgia. He received his Masters degree in tax law from the Thomas Jefferson School of Law in 2012, and his CPA from the Alabama State Board of Public Accountancy in 1984.

Darron Kendrick, CPA, MA

Financial Advisor

Expert Answer

There would be no goodwill in a situation based upon fraudulent information. At least not after the fraud was discovered.

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I would like to clarify how the annual profit is established when thinking of selling a business. Does it, for example, include the director's drawings/salary?

Michael R. Lewis
Business Advisor
Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. He has a BBA in Industrial Management from the University of Texas at Austin.

Michael R. Lewis

Business Advisor

Expert Answer

Buyers and sellers define profits as it best fits their purpose. For example, a seller would try to convince a buyer that owner and directors' compensation are discretionary and should be considered part of profits; a buyer might look at an income statement and consider the owner's salary unrealistically low because the new owner would hire someone for more pay. In other words, you can categorize profit on an income statement to your benefit provided that you give full disclosure and the books balance.

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