Goodwill

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While not registerable, oftentimes goodwill is the most valuable ‘intangible asset’ on a balance sheet for large entities.  Its value is based upon brand reputation and customer loyalty, among other hard to quantify metrics.  Goodwill is under the umbrella of ‘intangible assets’.  While not a form of IP (patents, trade marks, trade dress, copyrights and designs), goodwill results from, for example, customer engagement with trade marks, trade dress, designs and copyrights brand and marketing IP assets.

When Should a Company Calculate Goodwill?

While companies often wait until they are in a merger or acquisition to evaluate their goodwill, they should review the value of their goodwill at least once a year and make adjustments to its book value.  Goodwill can be calculated by establishing a value for the company and then deducting physical assets and liabilities and known values of IP to arrive at a leftover difference.  That leftover difference may be attributable to goodwill.

The individual components of goodwill can include high customer service quality, good employee relations and proprietary technology in addition to brand reputation and customer loyalty.   Establishment of metrics for goodwill components will provide more definitive goodwill assessments and potentially a higher book value.  One would hope that goodwill would improve over time.  Goodwill does not have a finite time period.

Are There Example of Goodwill Values?

Public companies such as Alphabet (Google) publish their balance sheets.  Alphabet’s goodwill and intangible assets for the quarter ending December 31, 2023 were $29.198B, a 0.82% increase year-over-year.  As the value of Alphabet steadily increases, so too has its goodwill which is approximately 7% of Alphabet’s book value.

How does a Company Grow Goodwill?

By building IP portfolios of trade marksdesigns, trade dress and copyrighted marketing materials and proprietary technology that is patented or the subject of trade secrets, a company can grow and experience the ancillary benefits which result in goodwill.  Additionally, employees and contractors’ loyalty also contribute to goodwill.  Positive customer loyalty metrics also contribute to goodwill.  That is, by building and managing IP portfolios and other intangible assets, goodwill naturally follows.  In this way, a company’s book value can be improved, allowing it to command a better price on acquisition or stock price and other valuable benefits.

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