Business Goodwill – What is it?

Goodwill is an intangible asset derived from other assets of the business. Its existence depends upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of the business.

graphs and chartsThe High Court of Australia has provided an extensive discussion of goodwill in Commissioner of Taxation v Murry [1998] HCA 42

Goodwill is a valid inclusion in a business valuation to the extent it possesses the following attributes:

  • goodwill must be of an enduring nature;
  • goodwill is attributable to cash flows expected from future business activity; and
  • goodwill must have commercial value (i.e., must be transferable to a third party).

Goodwill by its very nature cannot exist independently of the business which created and maintains it.

“goodwill is not something which can be conveyed or held in gross: it is something which attaches to a business. It cannot be dealt with separately from the business with which it is associated”. Barwick CJ  in  Geraghty v. Minter[1979] HCA 42 at 181

The value of goodwill is tied to the fortunes of the business in terms of its profitability and cashflow and the value of the net tangible assets utilized in the business. The value of goodwill will therefore fluctuate with the performance of the business.

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