When a company has a good reputation, a high status and many satisfied customers, it may be valued more highly than the sum of the company’s actual assets. If company is then sold, the price paid will often be higher than the company’s book value. The difference between book value and sale price is the value of the goodwill. The acquiring company recognises the difference as goodwill in its balance sheet.
It can be difficult to calculate the value of goodwill precisely, as it is not a physical asset. Examples of factors within the company which can increase a company’s goodwill include the competence of the staff and product development. A stable customer base with satisfied customers, a successful advertising campaign and a consistent approach to trademarks can also have a positive impact on a company’s goodwill. In the accounts, goodwill will be recognised as an intangible asset and be taxed accordingly. Goodwill is something that is considered to be capable of generating a profit for the company in the future.
The opposite of goodwill is badwill. Badwill can reduce a company’s profits and cause it to lose customers, suppliers or market value. Goodwill can quickly be turned into badwill, e.g. if a company does something unpopular which has adverse consequences, gains a bad reputation or is caught doing something illegal.
Test your business
In the test, we will help you identify your intangible assets: