Goodwill and its Role as an Intangible Asset Driving Business Value

 One of the crucial aspects of evaluating a company’s value is calculating its assets. There are two types of assets, namely tangible assets and intangible assets. Tangible assets refer to physical and quantifiable objects like machinery, products, infrastructure, etc. The intangible assets are non-physical but quantifiable. They include proprietary technology, licenses, copyrights, and so on.

Goodwill is generally perceived as the reputation of a company and the advantage a company has over others in the same field. While goodwill falls under the second category, it differs slightly from other intangible assets. What does this mean? Is goodwill a monetizable asset? How does it add value to the company? 

Many questions surround this topic. In this blog, we’ll answer them for you.

What is Goodwill?

Goodwill in business is a category of assets that cannot be physically quantified and neither be monetized directly nor priced individually. Some examples of goodwill are brand reputation, customer loyalty, public trust, research and development, the experience of its management team, etc.

The goodwill of a company cannot exist independently of the company. It cannot be sold, transferred, or purchased independently. It has an indefinite useful life.

The importance of goodwill comes to the fore during a merger or acquisition. However, it does not relate to the brand value, customer stickiness or customer loyalty generated by the company. 

How is Goodwill Different From Other Intangible Assets?

Goodwill is the premium Paid over the fair of assets during the purchase of company.

Goodwill differs from other intangible assets in that the latter is non-physical but identifiable. A company’s licenses, software, patents, website’s domain name, etc. come under intangible assets. These intangible assets have a value independent of the company and can be bought and sold independently. They also have a definite useful life compared to the indefinite useful life of goodwill. 

Goodwill can be thought of from an economic perspective. It is an aspect that can insulate the company from adverse economic times. A company can have a profitable business even when other businesses flounder due to financial stress.

How Does Goodwill Add Value to the Business?

The question of goodwill and its value arises when a company is being acquired by another. During an acquisition, the acquirer would buy the target company for an amount that includes the net assets at fair value. However, the actual acquisition amount would be higher than simply the value of the net assets. This difference in amount is usually accounted for as the value of the target company’s goodwill.

Goodwill = P-(A-L),

where:

P = Purchase price of the target company

A = Fair market value of assets

L = Fair market value of liabilities.

Although this formula is simplistic, the actual process of calculating goodwill can be quite complex. 

A company that does a lot of acquisitions would have goodwill increasing over time. However, it does not mean that its reputation is increasing. Similarly, a company that is writing off its goodwill from the balance sheet by charging it against the profits would have decreasing goodwill. It does not mean

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Summing It Up

Goodwill is an intangible asset that drives business value beyond the net value of its assets. Before you decide to sell or buy a company, it is vital to make a proper intangible asset valuation. This is why it pays to hire a professional valuation firm with years of experience and knowledge to perform a valuation of goodwill. 

If you are looking for a valuation firm that can do it for you, our team at RNC can help. Book an appointment with us to get your tangible and intangible assets are accurately valued.