Goodwill is no foreign term to any business. If you are someone looking to buy a property, especially a commercial one, you would have noticed the owner demanding a higher price than the net fair value of the property. That higher sum over the net fair value is what we call ‘Goodwill.’
Goodwill is an intangible yet valuable asset to any business. In simple terms, goodwill is what helps the buyer of the property make profits higher than the others in the future without having to make any extra efforts for it. It is the super profit that a firm earns over what it generally can earn. The goodwill of a business is created by its reputation amongst its customers, connections it has formed over the years and the word of mouth about the business in the market.
Even though an intangible one, goodwill holds a very high value as an asset to that business, sometimes even more so than the tangible assets themselves. Therefore when a commercial property is acquired, they charge not only for the asset but for the goodwill as well.
Some of the key aspects of goodwill are:
● The goodwill of a business must not be confused with other intangible assets. Unlike other intangible assets such as licences or patents, goodwill cannot be sold independently.
● Goodwill of a business has an indefinite life period, whereas other intangible assets have a definite one. For any further use of other intangible assets, they need to be renewed, but not in the case of goodwill.
● Because it has an indefinite lie period, there is no depreciation charged on goodwill. This however is not true in the case of any other intangible asset. And if a business runs smoothly, the value of its goodwill will likely keep increasing over time. This is also why goodwill is called an appreciating asset.
● There are various accounting methods used to calculate goodwill such as the super profit method, annulation method etc.
● A business holds its goodwill only until it is a going concern. As soon as a business decides to shut down, the value of the goodwill fizzles down to nil.
Goodwill of a business is however a subjective topic and its calculation may vary from business to business. So chances are that during the acquisition of a business, the buying company may not agree to the valuation of the goodwill made by the selling company.
