Accounting – A Brief Introduction to Goodwill

benevolence is the term used to describe the ‘good name’ or ‘Call’ earned by a company during its trading. When a company provides good service to its customers, it is hoped that they will keep coming back to that company’s services. This, in turn, will hopefully have a positive impact on the company’s future sales and profits. From an accounting perspective, goodwill represents an asset to the company and has a real monetary value.

The main characteristics of goodwill are:

  • It belongs to the category of intangible assets, which also includes other items such as patents, trademarks and copyrights. Goodwill along with these others Intangible assets are intangible assets and are included in the balance sheet.
  • It’s a valuable commodity.
  • It helps generate excess profits. The presence of goodwill is often the key to a company generating profits in excess of the levels of similar companies in the same industry.
  • Their value is subject to constant fluctuations.
  • Their value is not realized until a business is sold or transferred.
  • It is difficult to determine an exact value for goodwill and expert judgment will always be required.

The main factors affecting goodwill are:

  • The nature of the business. Goodwill relating to a service-based business is likely to differ from that of a manufacturing business.
  • Good location. If a company is located in a good location, this usually has a positive effect on the value of the goodwill.
  • longevity of the business. If a company has traded over a long period of time, it may have had more time to build a good, solid reputation and more goodwill.
  • Possession of licenses or technical know-how.
  • Customer Service and General Customer Support.
  • business risk involved.
  • Future competition and new entrants to a particular business market.
  • Attitude of management to fulfill commitments

Special circumstances when there is a need valuation of good will:

  • If the profit-sharing ratio between the existing partners changes.
  • When a new partner is accepted.
  • When a partner retires.
  • When a partner dies.
  • If the business is sold as a going concern.
  • If the company is merged with another company.

While not necessarily something that can be shown in black and white, goodwill is an integral part of a company’s value, and whether you’re looking to buy or sell an established business, it’s important not to underestimate its value.