1. A type of intangible asset that consists of a company’s brand value, reliable customer base, good employee and customer relations, and proprietary technology (e.g., patents), and reflected in the assets section of a company’s balance sheet. When one company purchases another, goodwill is the quality that drives the purchase price higher than it would be based solely on a calculation of assets and liabilities. Conversely, when a company is purchased for less than market value, it is often a sign of negative goodwill.
Goodwill can actually be calculated. You start by adding up the fair market value of the company’s assets and the fair market (negative) value of its liabilities. You then subtract that sum from the purchase price. The difference between the two is a calculation of a company’s goodwill.
It may seem odd to introduce a seemingly subjective emotional factor into a calculated business decision. But considering how brand-loyal Americans are, there needs to be a mechanism to account for building customer trust and loyalty as well as other factors which may potentially influence positive evolution and the ultimate success of the business.
2. Retail: A chain of thrift stores that, ironically, do not accept goodwill as payment for merchandise.
One tech giant decides to buy a similar company. The company has assets valued at $20 million and liabilities valued at $12 million. The math shows that the fair market value of the company would be $8 million. The business is ultimately purchased for $10.5 million, meaning that its goodwill value was determined to be $2.5 million.