Goodwill

What is goodwill?

Goodwill is an intangible value that a company holds beyond the fair value of its tangible assets. The concept of goodwill often comes into play when one company decides to acquire another. 

For example, imagine you own your own bakery and you’ve decided to sell your business to a competitor. You know the fair market value of your inventory and equipment, but what about the value of your top secret chocolate chip cookie recipe or the dozens of loyal customers you’ve earned over the years who are likely to continue to frequent the bakery after its changed hands?

Goodwill attempts to assign value to these other intangible assets to help determine the real fair market value of your business, so you can come up with a fair purchase price.

Examples of intangible assets that can be included in goodwill include customer lists, brand value, relationships with vendors, a compelling business history, or anything else that can’t easily be assigned a dollar value, but still adds to your company’s overall appeal and explains its excess purchase price.

FAQ

How do you calculate goodwill in business?

Measuring goodwill can be tricky since you’re assigning value to intangible assets. But any company that has acquired another is required to evaluate the goodwill value of the business on their financial statements at least once a year. To do this, they follow a simple formula that looks at the difference between the purchase price paid, and the fair market value of the target company's identifiable assets minus its liabilities. 

How can you build goodwill for your business?

Building a positive reputation for your business is often one of the most effective ways to increase its goodwill value, and there are a lot of strategies you can turn to in order to do this. Building a loyal customer base is a good starting point, but you may also want to build a loyal online following as well, as you can point to things like your number of social media followers as evidence of your company’s goodwill value.

As you work on building goodwill, consider how you can make marketing decisions that strengthen your brand’s reputation within your community, whether that’s by working tirelessly to ensure your product is the best around, or by supporting your community at local events. Generally speaking, anything that helps people view your brand in a positive light has the potential to help boost its goodwill value.

Is it possible to have negative goodwill?

Yes, just as goodwill is used to explain the excess purchase price paid to acquire a company, negative goodwill—also sometimes called “badwill”—is the term that applies when one company buys another at a price that is less than the fair value of its tangible assets.

Negative goodwill can happen for a number of reasons. For example, if the company has built a bad reputation with consumers, its intangible assets may actually become liabilities.