XYZ Hospital had been the brainchild of Dr. Cureitall, and he had been fully involved in the day-to-day running of the hospital until he decided to retire. While the real cost of the land, building, equipment and other liabilities was around $70,000, it fetched over $180,000 in a takeover.
In the example stated above, the additional $110,000 can said to be the value of the 'goodwill' of the hospital. So what is goodwill? When put in simple terms, it is nothing but the value of a business in excess to the value of tangible assets and liabilities. It includes the favorable reputation, strong client base, intellectual property and potential of making profit. Needless to say, professional goodwill or commercial goodwill (goodwill related to the institution or profession) and personal goodwill (goodwill related to an individual) play a very important role in business at every level of growth - when it is successful, in trouble or for sale.
Importance of Goodwill
Just as a good reputation is vital for the social standing of a person, goodwill is vital to the long-term success of any business. Some of the ways in which business goodwill affects a business are mentioned below.
- Goodwill in a business increases the number of return customers and recommendations based on their pleasant experiences.
- A well-established business goodwill increases the chances of loan sanctions from a bank and the interest of potential investors.
- It strengthens the business networks, opens new avenues and creates opportunities for expansion in business.
- In case of a blunder or mistake, people are more forgiving to a business based on the goodwill it garners, much like the mistakes of an individual with a 'good name' will be given the benefit of doubt.
- In any business, goodwill provides ammunition against resistance and sabotage.
- The equity value and the accounting value of a business are greatly affected by the goodwill of that business.
- As mentioned in the beginning of this article, goodwill is one of the major intangible assets of any business. Greater the goodwill of a business, greater the value of its intangible assets and thus, greater the acquisition price in a takeover.
How to Develop Goodwill
Goodwill in a business takes a considerable amount of time, efforts and resources to be developed. The key factors for developing goodwill in a business are listed below:
- Quality Product and Services: Nothing is more important for the life of goodwill in a business than the standard and quality of the products and services it offers.
- Unique Selling Proposition: A good business always has a USP by which it is identified - there has to be something in the business for people to be attracted to it.
- Satisfied Customer Base: A customer is more likely to return or recommend the services of a business if he/she has a pleasant and satisfactory experience in the first instance. Following good business ethics goes a long way in impressing customers and investors.
- Marketing and Advertisements: A business which is under the spotlight for the right reasons creates goodwill for itself. Offers, discounts and even Samaritan deeds in a business ensures its place in the good books.
- Strategy and Management: Goodwill has to be deliberately developed and it is possible to do so only if the employees are well-trained, reputed and capable. A good strategy or 'game plan' is essential to keep the business on track and motivated.
- Innovation and Expansion: For a business to be viewed as valuable, it has to be one step ahead of its competitors. Though it sounds clichéd, stagnancy has no place in the goodwill of a business.
- Profits and Gains: Customers and investors are more willing to deal with a business if it is profitable or if they believe that it has the potential of making profits (given a chance).
Once goodwill has been developed, there is a constant need to keep up and protect it from becoming stagnant or turning negative. But the benefits of goodwill in business make all the efforts worthwhile and satisfying. The adage 'the whole is greater than the sum of its parts' reinforces the importance of goodwill in a business - even a business with low real value can increase its market value if it can boast about a significant value of goodwill in the business.