Goodwill can be defined as the excess of book value of assets and liabilities and often needed in case of mergers and acquisitions. In simple words it can be defined as the probability of old customers who are satisfied with the services of the company returning back for future purchases.
Here are some of the features of goodwill –
1. It is an intangible asset implying that it is one cannot be seen or touched like land or building but it has certain value attached to it.
2. The value of goodwill is highly dependent on the person who is valuing the goodwill, in other words it is subjective in nature. Also it is difficult to assign a particular value to goodwill because it keeps on fluctuating on the basis of company’s performance.
3. It is dependent on various factors like location of the company, relationship with the suppliers, long term contracts of the company with customers etc….
Goodwill is considered to be primary reason for many mergers and acquisitions because goodwill brings customers to the acquiring company almost without any effort, though acquiring company has to pay price for goodwill.