Understanding the Value of Goodwill, the Intangible Asset

by / Thursday, 21 August 2014 / Published in Small Business Financing

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According to Wikipedia, goodwill refers to “a special type of intangible asset that represents that portion of the entire business value that cannot be attributed to other income producing business assets, tangible or intangible.” What this means in plain English is that, aside from the material assets of a business, such as its equipment, and tangible assets such a employees, there exists an intangible value that is comprised of brand recognition, customers, and cultural capital. Goodwill in accounting terms is the reason why a business that has $20K worth of equipment and property might be worth $100K to a buyer.

How can you increase the value of your business’s goodwill? When you increase your goodwill, you are increasing the value of your business, so ignoring this aspect of business development is a poor strategic move. Not only that, but goodwill tends to grow from positive customer service experiences contributing to word of mouth referrals and increased brand recognition, which is already a cornerstone of business development that should be recognized by growing brands. Having strong onboarding practices that allow your customers to seamlessly enter into a relationship with your company coupled with a strong level of quality and customer support is the base from which you will be able to grow your reputation. The non-accounting definition of goodwill means positive feeling towards someone, which your business should be focused on creating. Relationships with customers that are strong and based on mutual satisfaction will contribute to the tangible value of your non-tangible assets.

Speak to your accountant about growing your goodwill. Since poor accounting practices are a common area where small businesses lose a lot of money, it makes sense for you to visit your accountant more often, or if you are in charge of managing your own finances, review the books with greater frequency. Someone with a firm grasp of accounting who can help you put a value on the current goodwill of your business and explain why they have arrived at the number they throw out is a good sounding rod for finding areas to change in order to add further value.

Photo Credit to Dennis Wong on Flickr

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