The role of good will in credit taking
The notion of goodwill value is familiar to all business owners, although a precise description might be more difficult. Once we have looked at some definitions, we will tackle the question of valuing goodwill in a business. So, what is goodwill?
Legal definition
Probably the best-known legal definition is by Lord McNaughten in the case of I.R.C. v Muller and Company (1901) where he defined goodwill in the following way:
‘It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of a good name, reputation and connection of a business. It is the attractive force, which brings in custom. It is the one thing which distinguishes an old established business from the new one at its first start.’ This definition recognises that goodwill has the ability to bring in custom and, therefore, has a benefit, or value to a business, but does not go much further than that. You could, perhaps, deduce from this definition that goodwill is the intangible component of a business that enables the business to earn a greater income than could be generated by the net tangible assets alone.
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