What is goodwill? Goodwill is an intangible asset that adds value to a business. It is owned by and associated with the operation of a business. Some examples of these intangible items include the value of a company’s brand name, intellectual property, skilled labor, and customer loyalty.
The Importance of Reputation
It is hard to put a dollar amount on a good reputation. Let’s imagine that you had a choice between two businesses that were almost identical. One business had a strong reputation. The other business had a reputation for poor customer service and inferior goods and services. This decision would be be an easy one for most prospective buyers.
Beyond the Numbers
Goodwill usually plays a major role when a buyer pays more than the recognized value of a business. It can include many intangible items. Some of these include, good customer relations, strength of the local economy, good relationships with suppliers, and brand recognition.
The Evolving Meaning of Goodwill
Recently, the accounting profession has changed how it deals with the concept of goodwill. Since the rise of the Industrial Revolution, many large companies were built around the ownership and use of heavy equipment and machinery. In the last two decades there has been a shift away from tangible assets and towards intangible assets.
Assets under intellectual property are now considered key aspects of goodwill. These include such things as patents, trademarks, and brand names. In the last 20 years goodwill has taken on a more complex and varied meaning. Today, businesses are not necessarily based around massive factories and huge assembly lines. Management in the world’s largest companies 50 years ago would be hard pressed to explain the inner workings of some of today’s corporate organizations.
Goodwill is more complicated than ever before. This is why it is important to work with an experienced M&A advisor. An experienced M&A advisor will highlight the goodwill elements within a business. This will enable prospective buyers to fully understand the business’ real value.