Role of goodwill in augmenting the business value
Hey there! Today’s blog topic is quite interesting as we’re going to study a crucial intangible asset (goodwill) that every company works hard to earn. It’s a business’s goodwill that adds value to it and thereby, making customers loyal towards the company’s brand. So, in today’s article, we’ll discuss what is goodwill and how it plays a fundamental role in augmenting the business value.
What is Goodwill?
When the tangible assets of a company are valued and there exists a difference between the actual purchase price of those respective tangible assets and the current value of assets, then that difference value (Current value of the tangible assets — Purchase price of the assets) is the earned goodwill of the company.
For example, there are two firms namely, A and B. Firm A is well established in the market for 10 years whereas Firm B is just a startup. Now, XYZ Suppliers is a common supplier for both firms. Firm A purchases the bulk inventory of Rs.10 lakh on credit, on the other hand, Firm B purchases inventory of Rs.10,000, and asks for credit, but the supplier denied. Now, you’d be thinking why do the supplier gave the credit to Firm A and not to Firm B? Well, it’s just because of the earned and established reputation and goodwill of the firm that it encompasses over time.
In other words, the hidden value earned by a concern in the form of an intangible and fixed asset by maintaining a strong market long-term relationship and good reputation is said to be the firm’s respective goodwill.
Objectives of creating goodwill in the market
- To meet uncertainties arising due to the inability to meet obligations.
- To build long-lasting and strong business relationships.
- To evoke the inner potential strength of the business within and outside the concern.
- To create a strong market reputation.
- To build an efficient management structure.
- To attract more talented and skillful candidates.
- To determine the true value of the business and see what needs to be done to make it better.
Factors affecting the value of company’s goodwill
Just like the revenue structure of a business depends on several factors, similarly, the goodwill creation of an organization depends on several factors. Some of them are discussed below.
• Location
If the business is market-centered, then it will be able to earn more refined goodwill as compared to the business located in the remote areas where the customer access is comparatively lesser.
• Nature of the business
The goodwill component is also dependent on the nature of the business, like the nature of the goods the business deals in, the degree of risk involved, and many other factors. If the products possess stable demand, it will bring more profits for the business and it will, therefore, enhance the goodwill of the business.
• Market reputation of the concern
The other important factor is the market reputation that a concern holds. If a business possesses a strong reputation in the market, it will automatically have a higher value for goodwill.
• Type of market competition
In the market, we can see numerous forms of market namely, perfect competition, monopoly, and monopolistic competition. So if the monopoly market prevails, it will enable the monopoly seller to establish its control over the market price and supply and it will, therefore, fetch higher value of goodwill.
• Efficiency level of business
This point is self-explanatory as more efficient the business management is, higher will be the value of the goodwill and vice versa.
• Tendency of meeting social obligations
An organization that serves the customers well and takes care of the social responsibilities, such business is supported by the government and it, therefore, brings the higher value of goodwill for that concern.
Significance of goodwill in augmenting the overall value of the business
Just like seeds sown give the fruits to the farmer, in the same way, when a business serves the customers well, it brings value for the company. Below given are some points of importance that goodwill adds to a company.
Adds monetary value to the business
An enterprise that has a good market reputation and goodwill, brings monetary benefits to the business and adds value to the overall assets of the company.
Builds a brand image in the market
Mere profit-making isn’t enough for any business. Therefore, to withstand market competition, goodwill helps in establishing a brand image in the market. This leads to multiple benefits including monetary and other key benefits.
Enhances creditworthiness of the company
A good brand image or higher value of goodwill helps a company to enhance the creditworthiness of the concern. Stable credibility helps the business to get easy credit from the concerned parties.
Government support to the established brand
This point of importance is also self-explanatory because a brand that is well established, meets the social obligations and give out their best for social betterment, is always supported by the government in every sphere.
Sets standards for other entities
The businesses that have a good market image, envisage standards for other concerns also, and this brings more and more enterprises on the ground.
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