Goodwill is something that adds significant value to your company, but that can’t really be given a price tag.
Goodwill is considered an intangible asset, and examples include a good reputation, customer satisfaction, and future potential.
While it’s crucial for your company’s future financial success, it’s not easy to place it in your financial statements.
Building goodwill
When you build goodwill you take steps to increase the value of your business, without directly selling products or services. It comes from satisfied customers, the quality of your products or services, and your reputation and relations with clients and suppliers.
You can’t buy goodwill, you have to earn it.
Satisfied customers can lead to positive word of mouth and new costumers. They can also leave glowing reviews on Google or write an article about your product or service. A happy customer is a free and powerful marketing tool.
This type of goodwill is crucial for all types of businesses, no matter the size of the company or what industry they operate in.
You can also build goodwill on social media, by running campaigns and by posting content that creates a positive image and brand. Many businesses and individuals do online research before they buy goods or services.
See also: How to build great relationships with customers
How to measure it
A company with a lot of goodwill will most likely have a positive working environment and satisfied employees. This is an important factor when trying to hire new talent and building trust and reputation with long-term clients and suppliers.
Measuring it is challenging as it changes over time and its value is often intangible.
However, while it’s not generally part of your accounts, your general ledger, it is included as an asset, specifically a fixed asset, in financial statements when a company is being sold or purchased.
If the acquisition cost exceeds the company’s actual value, the surplus is registered as ‘purchased goodwill’ in the buyer’s balance sheet. You have to pay corporate tax on this.
On the other hand, when a company is bought for less than the total value of its assets, the difference is considered ‘badwill’ or ‘negative goodwill’. In these cases, the seller might get a tax deduction on their loss.