The meaning of goodwill
Goodwill is a term we hear about often, but interestingly, is rarely mentioned in legislation. In fact, the term 'goodwill' is not defined for the purposes of the Capital Gains legislation in TCGA 1992.
Most definitions of goodwill are derived from case law. You could describe goodwill as the 'extra' value attributed to a business over and above a valuation of its tangible assets.
In the vast majority of cases when a business is sold, a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business's reputation and customer relationships. Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.
HMRC’s internal manual states that:
'Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.'
As the value of goodwill is likely to be a significant component of a businesses' net worth, consideration of valuation methods will need to be carefully considered should the business owners seek advice on a sale.