Goodwill – The excess of a corporation’s expected profitability over average, the resulting difference being the excess of the corporation’s market value over its book valuation of assets.
Reflects the corporation’s advantages in business relationships, image, market revaluation of intangible assets, innovative success, and possession of effective know-how.
Let’s say you want to buy a company that has made a name for itself on fashionable homeware. The value of the company’s tangible assets is 10 million rubles, but you will pay 13 million rubles because you will also get a well-known brand, a business reputation, established relationships with partners, a customer base, and carefully selected and trained staff. This intangible part, which increases the value of the company, is goodwill.
Distinction
Goodwill is different in that it is inalienable from the company: it can only be sold together with it. It grows as the company grows and shrinks when it fails. At the same time, it makes a real profit for the company and affects the value of its shares.
Goodwill is roughly calculated using the formula:
Goodwill = the purchase price of the company – book value of assets – liabilities.
The result can also be negative: in the case where a company is sold at a price lower than its tangible assets, we are very likely dealing with bad will – a bad business reputation.
Fact
For some large companies, the value of goodwill is comparable to the value of their tangible assets: for example, Apple has $230 billion (as of summer 2021).
