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CBSECommerce (English Medium) Class 12
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Syllabus

Concept of Goodwill

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Topics

  • Introduction
  • Meaning
  • Definition: Goodwill
  • Characteristics
  • Nature of Goodwill
  • Need for Valuing Goodwill
  • Factors Affecting the Value of Goodwill
Maharashtra State Board: Class 11
CISCE: Class 12

Definition: Goodwill

  • ''The term goodwill is generally used to denote the benefit arising from connections and reputation.'' - Lord Lindley
  • ''Goodwill is nothing more than the probability that the old customers will resort to the old place.'' - Lord Eldon
  • ''Goodwill may be said to be that element arising from the reputation, connections or other advantages possessed by a business which enables it to earn greater profits than the return normally to be expected on the capital represented by the net tangible assets employed in the business.'' - Spicer and Pegler 
  • "When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts." - Dicksee
Maharashtra State Board: Class 11

Factors Contributing to Goodwill

What Makes Goodwill?

Factor That Builds Goodwill What It Means
Favourable Location Business is in a busy/popular place—more people notice it
Skilled Staff/Management Friendly, expert employees attract and keep customers
High Quality or Service People return because of best or unique items/services
Customer Satisfaction Happy customers come back and bring friends
Good Reputation Known for honesty and years of great service
Maharashtra State Board: Class 11

Types of Goodwill

Type Meaning
Purchased Goodwill Goodwill someone pays extra for when they buy an established business
Self-Generated Goodwill Goodwill built slowly by providing great service and building trust
Institutional Goodwill Goodwill coming from the whole team, system, or brand—not just a person
Professional Goodwill Goodwill based on a skilled person’s reputation
Maharashtra State Board: Class 11

Real-Life Examples

Aspect Example
Factors That Build Goodwill  
Favourable Location Starbucks in a crowded city center gets more walk-in customers.
Skilled Staff/Management Apple stores hire friendly, knowledgeable staff to help customers with technology.
High Product/Service Quality Nike’s high-quality shoes keep customers loyal.
Customer Satisfaction Amazon’s fast deliveries and helpful return policies result in many repeat buyers.
Good Reputation Gillette’s products are trusted, so when Procter & Gamble bought it, it paid extra for its reputation.
Types of Goodwill  
Purchased Goodwill Company A buys Company B for ₹50 lakhs, even though B’s assets are worth ₹40 lakhs; the extra ₹10 lakhs is purchased goodwill.
Self-Generated Goodwill A local coaching center becomes popular through excellent teaching and student results.
Institutional Goodwill A hospital in Mumbai is trusted for its world-class care, even when management changes.
Professional Goodwill A famous lawyer whose practice is valuable mostly because of his/her personal reputation.
CISCE: Class 12

Key Points: Goodwill

  • Meaning: Goodwill is the reputation of a business that helps it earn more than normal profits.
  • Nature: It's an intangible but valuable asset, sold only with the full business. Only purchased goodwill is recorded.
  • Features: Attracts customers, earns extra profits, value keeps changing, can't be sold alone, and hard to measure.
  • When Valued: On partner admission, retirement, change in profit-sharing, sale, or merger.
  • Factors Affecting: Management, location, age, profit trend, quality, licenses, and market conditions.
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