Ask an Adviser - What Is Goodwill?

Top answer provided by:

Lynette Murray

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Goodwill is an intangible asset of a company as it does not have a physical presence. All businesses have some element of Goodwill. It can include a business’s reputation and performance, branding, customer base and loyalty. Goodwill is generally accounted for on a Company balance sheet and can be difficult to value.

Goodwill is built overtime as customers grow to know a company, its business and they become accustomed to a standard of service. This standard is what a customer becomes comfortable with and a change in even the slightest to the standards established over time can have a detrimental effect on a business’s goodwill.

Think of Qantas and their claim that they are the “safest airline in the world”. One tragic accident would mean loss of this reputation which would harm the business and have a negative impact on a business’s goodwill.

Any business needs to be mindful of the effects the slightest changes in their product or service can have to the goodwill they have built up over the years. We all know the Arnott’s Shapes brands which have been around for decades. It is a beloved biscuit of many Australians and in the past year, you will remember the issues which arose when Arnott’s changed the recipes for their beloved Shapes brands. The change in the flavours of their Chicken Crimpy, Pizza and Barbecue Shapes did not resonate well with consumers resulting in a detrimental effect on the Company’s goodwill with many consumers venting their anger to the unnecessary change in recipe. The brand and product that consumers had become accustomed to had changed overnight resulting in clients boycotting the ‘new and improved’ Arnott’s products. Following an outcry from consumers Arnott’s were forced to return to the old recipes which their customers had become familiar with. This is a good example of how one slight change can have a negative effect on goodwill which has been built over many years.   It should be noted that without goodwill a business would not exist.

Although goodwill can add great value to a business, within a small business with a strong dependence on the owner/key-person, it’s important to consider who has the goodwill (is it the business or is it a key-person).   A hairdressing salon would be a good example of where the business might have the goodwill, or maybe the goodwill belongs to the individual hairdresser.  

I’m not sure why you were asking about goodwill, but if it was because you are looking at buying a business, I strongly suggest you get professional advice on how to value that goodwill and to develop plans to crystallise/protect that value.

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Article by:

Douglas from Sydney

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