The worth of business goodwill is measured to determine whether a business should continue or liquidated. A Positive goodwill value shows that the business value is more than the value of the business asset base (Ahmed, 2007). The value of business goodwill is determined by a number of factors that have an impact on the earnings of a business (Ahmed, 2007). Which include a business location, marketing and production technology, competition, employees’ relations, government interventions, products and services quality, management skills, business risks involved customer relations and favorable contracts (Ahmed, 2007). These factors can be analyzed using the PESTEL analysis tool to determine their effects on the value of a business’ goodwill (Ahmed, 2007).
Political factors determine the level of government involvement in the businesses operations in a given country (Kumar, 2015). Government interference can be in the form of political stability, fiscal policies, taxation, trade restrictions and patents (Team FME, 2013). For example, a peaceful country offers a conducive environment for businesses to thrive, hence increasing a business’ goodwill value (Kumar, 2015). Also, punitive taxes are not attractive to businesses as they reduce the level of their income, reducing the goodwill value. Punitive taxes are taxes whose purpose is to punish. On the other hand, a business with registered patents has a higher goodwill value. A government view on a certain business determines its future opportunities and performance which has an impact on the goodwill’s value (Ahmed, 2007). Subsidies, preferential licenses, tax reliefs and good infrastructure from the government increases the goodwill value whereas policies imposing restrictions reduces the goodwill value (Ahmed, 2007).
Economic factors like interest rates, inflation, conditions in the money market and foreign exchange determine the performance of a country’s economy directly impacting on a company’s performance in the long run (Kumar, 2015). Inflation affects the pricing of goods in an economy which also has a ripple effect on the sales a business make as a result of reduced purchasing power (Kumar, 2015). During a recession, a business’ goodwill value reduces compared to a stable economy where the goodwill value increases (Ahmed, 2007). As such, earlier assessments of goodwill have to be altered. When economic conditions are favorable, Businesses are encouraged to expand and take more risks, for example low interest rates allow businesses to borrow and invest more (Ahmed, 2007). This in return increases their returns hence enhancing the value of the business goodwill (Ahmed, 2007).
Social factors affecting a business include demographics and cultural trends that affect the behavior of consumers (Reilly, 2015). The social factors focuses on the forces within the, family, media and society hence having an impact on sales and revenues of a business. Social factors determine who we are, and affects ones behavior and what one buys. If a business products or services conform to the beliefs of the society, it would mean that business will attract more customers, building their brand and sales (Ahmed, 2007). This has a positive impact on the goodwill of the business in that the goodwill becomes more compared to a business that ignores the needs of its customers (Team FME, 2013).
Technological factors that affect a business include innovations in services and products due to technology. Technology refers to research, development and automation in the business market (Geddes, 2002). When a business has a technology that gives them an edge over other businesses, they can have the technology protected through patents, trademarks and copyrights. This acts as a measure for lenders, customers and investors, hence increasing the goodwill value (Ahmed, 2007). Business with high technology is famed and through its quality products, attracts more customers (Reilly, 2015). Also, automation of process enables a business to leverage on production cost, increasing the business earnings.
Legal factors could be both internal and external. Laws can originate from the government where the business operates or from the business itself (Reilly, 2015). Examples of these laws include labor laws, health, safety laws, consumer protection laws and discrimination laws. Businesses are required to comply with these laws at all times, and they are given a certificate of compliance. A business that is legally compliant is more attractive to the public and safe to deal with than a noncompliant business, increasing its goodwill value (Geddes, 2002; Reilly, 2015). Healthy industrial relations stipulated in the labor laws have an impact on the business’ workforce. A business with good relations portrays prosperity by motivating its workers to work hard and increase the business output, hence adding value to goodwill (Ahmed, 2007). Also, if a company has an operating license that stretches over a long duration, the value of its goodwill will be more (Ahmed, 2007).
Environmental factors affecting business operations include weather, location, climate changes and policies on environment conservation. There is also pressure on businesses to address environmental issues and to operate in ways that benefit society. A business that is located in a favorable location that has good infrastructure for efficient operations of the business, has more profits and this in return enhances the goodwill value compared to those operating in harsh conditions (Reilly, 2015). Also, a competitive business environment eliminates the aspect of a company becoming a monopoly. When a business is a monopoly, it commands a higher value of goodwill than a business that is open to competition. Most of the environmental factors apply to specific industries that must comply with environmental policies for them to continue operating, for example applying eco-friendly practices in business (Geddes, 2002).
References
Ahmed, N. (2007). Corporate Accounting. New Delhi: Atlantic publishers and distributors
Geddes, R. (2002). Valuation and investment appraisal. Kent: Financial World Pub.
Kumar, P. (2015). Valuation of Goodwill: Necessity, Factors, and Methods. YourArticleLibrary.com: The Next Generation Library. Retrieved 25 March 2016, from http://www.yourarticlelibrary.com/accounting/goodwill/valuation-of-goodwill-necessity-factors-and-methods/62722/
Reilly, R. (2015). Goodwill Valuation Approaches, Methods, and Procedures. Financial Advisory Services Insights, 1-15. Retrieved from http://www.willamette.com/insights_journal/15/spring_2015_2.pdf
Team FME. (2013). PESTEL Analysis:Strategy Skills (1st ed.). www.free-management-ebooks.com. Retrieved from http://www.free-management-ebooks.com/dldebk-pdf/fme-pestle-analysis.pdf
