Goodwill

Financial Dictionary -> Investing -> Goodwill

Goodwill to our fellow men is all fine and dandy, but in the rat race that is business, good will has quite a different meaning. The word is applied to an intangible asset that provides some kind of competitive advantage, not necessarily because of the asset itself, but because of its reputation. This is usually referred to when talking about brands or brand image.

For example a warehouse with five store outlets and $3 million worth in sneakers on its own might be worth a reasonable amount, but if that asset is attached to a brand name, for example Nike, then its brand image pumps up the price and makes the asset worth considerably more. But at the end of the day they are still sneakers, a warehouse and several stores.

You may often hear the phrase a 'goodwill acquisition' which simply means an asset has been sold with this competitive advantage of strong brand image.

Goodwill is even written on the balance sheet of the buyer, and the amount listed is whatever goes beyond the worth of the basic net tangible assets. For example on their own the $3 million worth of sneakers and the associated buildings, taking in to account production costs may be worth around $15 million, but because of the Nike brand it may hold a much higher value. Whatever that extra value amount, it is headed under goodwill on the balance sheet.

Goodwill is not necessarily all about brands though. A company with a positive public image because of their environmentally friendly policies or a business that is renowned for its efficient and highly motivated workforce can all be considered to have goodwill on top of the basic asset. There is no strict definition and most businesses have some form of goodwill value.