Goodwill
The intangible value of a business above its net asset value, representing reputation, customer relationships, and brand.
Full Definition
Goodwill is the intangible asset representing the excess of purchase price over the fair value of identifiable net assets acquired. It captures value drivers that cannot be separately identified.
Components of goodwill:
- Brand reputation and recognition
- Customer relationships and loyalty
- Assembled workforce
- Favourable contracts and locations
- Synergies expected from acquisition
- Going concern value
Accounting treatment: Under UK GAAP (FRS 102):
- Goodwill is capitalised and amortised over useful life (max 10 years if uncertain)
- Annual impairment review required
Under IFRS:
- Goodwill is capitalised but not amortised
- Annual impairment testing required
Tax treatment in the UK:
- Goodwill acquired as part of a business is generally not tax deductible for corporation tax
- Pre-April 2002 goodwill may have different treatment
- Asset deals: Goodwill allocated to purchase price impacts stamp duty
Valuation implications: High goodwill relative to net assets indicates an earnings-based valuation where buyers are paying for future profitability rather than tangible assets.
Related Terms
Asset Purchase
A transaction where the buyer acquires specific assets and liabilities of a business rather than its shares.
Valuation
The process of determining the economic worth of a business for sale, investment, or other purposes.
Enterprise Value
The total value of a business including both equity and debt, representing the price to acquire the entire entity.