Quote Originally Posted by Dave A View Post
Need to get more specific.

You can't add goodwill to a balance sheet without a sale of the business from one owner to another.
You shouldn't add goodwill to a balance sheet without a planning sale of the business.

In practice though it is done many times when a company hits a cash slump then later on you battle and battle to get rid of it until you sell the company then the existing goodwill gets credited and your capital gets debited so the company owes the seller less money. All he can do is hope the new owner pays him the same goodwill so that he breaks even, otherwise he is no better off selling the company, hence if put him in the wrong vicious circle.

Its basically a way to keep a company in operation over the long term in spite of immediate cash flow problems.

My advice, if you want a goodwill asset, it is a good indicator if your business is growing or not, but then add in either a general reserve or an asset replacement reserve to aid in reducing future expenses, coz when you sell.. the debits and credits cancel each other out and you capital figure you were always looking at doesnt change drastically.

If you write software your whole business is creating industry norm techniques to give you the edge.

Eg: you need an accounting package... so I write you one.. it takes me 3 years @ R 0 because I did it myself in my spare time. The goodwill asset cost me nothing, but if someone else wants it, he must either pay someone who can do the job for 3 years (eg 36 months @ R15000 = R 480 000) (or hire 3 people over 1 year) so that means if I sell my company, I can get R450 000 and the other oke gets a bargain.

If I want cash now though, I tell the bank I have this intangible asset of R450 000 and they basically give me 75% of it as a funding scheme so I can sell it to customers in the mean time for a monthly license which is much less than a customer paying me R450 000. But if I dont need the cash now, I dont bother with saying it is worth anything unless I want to sell the business.

That said, software isn't truely speaking goodwill though, but is the same concept. Goodwill is usually calculated from past financials to see how easy the profits came.