Valuation involves as much 'Art' as it does
'Science' and the reality is that much of this statement is
driven by the concept of goodwill.
In technical financial terms, goodwill is the excess of a
purchase price paid over the book value of the net assets sold, in
other words, the intangible value that a buyer pays for.
In the abstract, goodwill represents the inherent value of a
going concern business, attributable to widespread positive
recognition for a product and/or level of service by the public,
generally by virtue of being able to generate sustainable cash flow
as a result of this recognition- so what exactly does this
mean?
Essentially, the assets of a business are worth the cash flow
they are able to generate. Risk and future stability of cash flows
are considered by a prudent buyer through a review of qualitative
features of a business, ultimately influencing the level of
goodwill that a buyer is willing to pay for.
