Goodwill, as intangible property, is a common assists in trade or business. It may be said to be that element arising from the reputation, connection 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. Goodwill can be described as every advantage that has been acquired by a firm or company in carrying on its business. This could be connected with the premises in which the business is carried on or with the name of the business or with other matters carrying with it the benefit of the business. “The expectation of continued public patronage” and “the probability that old customers will resort to the old place” are common aspects of goodwill. The goodwill of a business may arise from a combination of various factors; some of the usual ones are the:
- personality and ability of the proprietor;
- name or reputation of the business; and
- character and situation of the premises.
Three types of goodwill can be identified as follows:
a. Personal goodwill: Personal goodwill, as the name implies, is attached to the owner of the business, such as the ability of a caterer or seamstress to make customers feel that they are very special people.
b. Inherent goodwill: Inherent goodwill is attached to the business, the name or reputation of the business and the quality of goods sold, like multi-national companies known for their products. The RICS Red Book Guidance Note 1 defines Inherent goodwill as:
“A market-based concept whereby a potential purchaser and thus the Valuer, estimates the maintainable level of trade and future profitability that can be achieved by a competent operator of a business conducted on the premises, acting in an efficient manner. The concept involves the trading potential rather than the actual level of trade under the existing ownership so it excludes personal goodwill”.
c. Adherent goodwill: Adherent goodwill is connected with the situation or location of the premises at which the business is carried on, Vic a petrol filling station in a good position on a busy high street.
Goodwill is not sold separately, but it is sold when a business is disposed off, and it is valued as a distinct item. Personal goodwill is note a saleable asset because it is attached to the person/owner. Inherent goodwill is saleable with other assets of the company. Adherent goodwill forms an element in the value of the premises. If the goodwill of a business is sold, the buyer acquires the following rights:
- The right to use the name of the business
- The right to advertise in that name
- The right to use the trademark of the business;
- The right to carry the benefit of any covenant which the former owner for the purpose of limiting competition or increasing the market
- The right to get an agreement from the former owner of the business not to carry one similar business within a certain radius or during a certain period of time
