Business goodwill: an analysis of its conceptual foundations

Abstract

The original intention was to write a thesis that critically reviewed several techniques that have either been employed or advocated in valuing the goodwill of a business. While working along these lines it became increasingly apparent that the accounting literature dealing with 'goodwill' was only superficially conversant with the real nature of the concept that was being valued. There was a surprising gap in the literature examined of any significant analysis of the fundamentals of the concept - all the more surprising since one might expect accounting theorists, at least, to be sufficiently stimulated to enquire into the nature of goodwill, more so as its intangibility stamps it with a nebulous quality. This striking deficiency in the literature led to a rethinking of my aims in researching this area of financial accounting theory, and before long I was forced to decide whether to follow the well-trod paths of valuation techniques and their associated problems, or whether to blaze an original trail and analyse the foundations of the concept itself. The latter course was chosen, primarily in an attempt to partially fill this gap in the literature, but also with the secondary aim of providing, in a humble way, a springboard for further considerations into the nature of the concept. With hindsight now that this research project has been completed, it can be categorically stated that this study would have been much easier if a destructive approach had been taken (i.e., a critical analysis of existing valuation theories) instead of the constructive one that was adopted (i.e., the formulation of one's own ideas as to what constitutes the underlying nature of the concept).

In an endeavour to make a positive contribution to the controversy surrounding this topic in accounting, this thesis conducts an analysis into the conceptual foundations underlying the goodwill of a business. The first chapter takes note of the existing confusion in legal and accounting circles as to the nature of the asset and argues that the goodwill of a business represents an 'environment' within which a going-concern operates, an 'environment' which is based on four areas of influence: customer goodwill, employee goodwill, industrial goodwill and financial goodwill. Chapters two to five inclusive take each of these areas in turn and analyse the conceptual foundations appropriate to each. The sixth chapter argues that these various areas of influence produce an overall environment or 'status quo' for each firm, and that this environment is what is meant by the expression 'the goodwill of a business'. In order to reduce the size of chapter one, Appendix A lists 82 definitions that have been extracted from a chronological survey of the literature. (From Preface)