What is Goodwill?
Goodwill is an integral part of any business. Find out what is meant by goodwill, and why it is important if you are buying or selling your business.
Business is not wholly and solely a matter of sales, numbers, and data. There are many other factors to consider when assessing the viability of any business. Sometimes the qualities of a business can be difficult to measure tangibly. The qualities or attributes that cannot be measured in strictly empirical terms are known as goodwill. This is an incredibly important part of any business. When you are making financial decisions, the future is just as important as the present, if not more so. Therefore, goodwill is not to be underestimated, as it may give insight into where and how a business might develop in times to come.
If you are looking to buy or sell a business, you will need to know as much as you can about this concept. Whilst in the process of drafting up a business sale agreement, you will see how goodwill becomes a key component. We have outlined some relevant information for you below.
Types of goodwill
There are many different types of products and services in the modern world. Accordingly, businesses can take on a number of dimensions and goodwill can manifest in a number of ways. It is important to consider the following attributes of a business:
- Firstly, brand identity.
- Customer and client network.
- Furthermore, reputation among those customers.
- Anticipated growth of sales.
- Lastly, reputation in the industry.
How is the value of goodwill determined?
Unfortunately, as with anything intangible or abstract, it can be difficult to determine the precise monetary value of goodwill. Much of this will come down to the negotiation process. If you are the purchaser of a business, it is important to complete your due diligence. This due diligence may involve assessing customer reception to the business as well as understanding how the vendor has conducted the business in practice. As the vendor of a business transfer, it is good practice that you maintain a positive reputation in the industry so that when time comes to sell up, you can say with confidence and in good faith, how much you believe your goodwill is worth in dollars.
Some helpful information on valuing a business is available on the Australian Government Business website. Furthermore, you may wish to read about goodwill in respect of tax laws and what your legal responsibilities are in terms of allocating value to underlying assets. If you are still uncertain about the negotiation process in the sale or purchase of a business, it may be useful to contact a business lawyer.
Paul is an intern at Lawpath, and is currently studying a combined Arts/Laws degree with a major in criminology at Macquarie University. Paul has an interest in legal tech, which complements his broader interest in cyber crime/security and the way in which it is changing the world.