Why do we have goodwill? How is it valued?

Answer 1

Goodwill represents the excess of the purchase price of a business over the amount allocated to tangible and identifiable intangible assets of the business.

It's valued at 'cost' as defined above. Periodically (at least in the US) it's evaluated for impairment, usually using discounted cash flows or some other valuation method.

Answer 2

If you have a factory costing $100, and it makes a product which makes you a profit of $50 per year, you are doing better than having your money in the bank. You would then only sell your factory for more then $100. What the sales price for the business is more than the cost for the factory, is goodwill.

Or put another way, a bottle of Coke costs say $1, but you are willing, for whatever reason, to pay say $3. (You like it, there marketing works, etc) This extra that you are willing to pay, multiplied by all the people that are willing to do so, gives the value of the brand. What the value of the brand is more than the cost of making the product, is goodwill.

How do you calculate it? Nearly impossible, and subject of many debates.

Then there is also accounting goodwill, where you pay more for a business, than what it is recorded in its books for. So when you do a consolidation, your purchase price less the assets you bought leaves you with an amount of goodwill.

Answer 3

"Goodwill" is an intangible measure of the worth of a business as a going concern, above and beyond the aggregate tangible worth of the individual assets owned by the business. It usually represents the future earnings power of the business because of established infrastructure, customer base, identity, brand, location, intellectual capital, and other soft factors accountants do not recognize as "real."

There is no practical way to value or measure goodwill unless you actually sell the business. Business appraisals can try to estimate it, but quite frankly most small business appraisals I have seen are not worth the fees their owners paid to have them performed; small business valuations are too unstable and circumstantial. It only becomes known and "real" when someone is actually willing to pay for it.

Answer 4

dunno