TeachMeFinance.com - explain goodwill
Goodwill -- An intangible asset of a business that relates to a favorable relationship with customers, and excess earning power.
goodwill -- the difference between the market value of an institution's assets and the higher amount paid at the time the institution is purchased or merged into another institution. Rather than making the acquiring institution immediately deduct the difference from its stated assets, accounting procedures allow the institution to amortize the goodwill over the average life of the acquired assets -- usually 10 to 30 years. In a broader sense, the acquiring institution is amortizing the premium it paid to acquire the goodwill of the disappearing institution's customers. See supervisory goodwill.
Goodwill -- in its commercial sense, is the present value of the right to receive expected future super-profits, the term " super-profits " meaning the amount by which revenue, increase, or advantage received, exceeds any and all economic expenditure incidental to its production."
Thus, subject to the qualification mentioned below, no present exchangeable value in the nature of goodwill can exist unless the expected future revenue, increase, or advantage either consists wholly of super-profits, or is greater than all economic expenditure incidental to its production. Such expenditure would include any and all current expenses, expired capital outlay (depreciation) on wasting assets other than goodwill, personal remuneration sufficient to secure continued successful management (which may possibly need ability of a high order), and a rate of interest on capital invested which will attract and retain any necessary capital, having regard to the degree of risk incidental to the character of the undertaking.
There is one necessary qualification to the above definition when it is applied to the goodwill of a professional practice, or of a business undertaking needing special knowledge, skill, and ability to carry it on successfully. In such cases it is often worth the while of the qualified practitioner, or of the trained man of business or trader, to pay a sum of money, by way of goodwill, although future super-profits are not expected to arise, in order that he may at once become possessed of an established connection, without which he would be unable to use his capabilities to the best advantage. The alternatives being for him either to attempt to build up a new connection, db initio, or to accept service as a paid assistant to another, when, in either case, his earnings would be considerably less than he would expect if able at once to bring his special knowledge to bear upon an established connection. Thus, the value of the goodwill of an undertaking required for use in combination with the personal knowledge, skill, and ability of the purchaser may be due to, and will vary with, the degree of opportunity for profitable use which the prospective purchaser thinks he possesses.
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