Goodwill refers to the intangible value of a business that arises from its reputation, customer relationships, brand recognition, and other non-physical assets. It is often considered when valuing a business during a sale or merger.

Characteristics:
– Intangible Asset: Goodwill is not a physical asset, meaning it cannot be touched or seen.
– Value from Relationships: It encompasses the value derived from customer loyalty, employee relationships, and supplier connections.
– Brand Recognition: A strong brand can significantly enhance goodwill, as it often leads to repeat business and customer trust.
– Market Position: A well-established market presence can contribute to a higher goodwill valuation.

Examples:
– Acquisition of a Business: When a company buys another for more than the fair value of its tangible assets, the excess amount is recorded as goodwill on the balance sheet. For instance, if Company A purchases Company B for $1 million, and the fair value of Company B’s tangible assets is $700,000, the $300,000 difference is goodwill.
– Franchise Value: A well-known franchise, like McDonald’s, has significant goodwill due to its brand recognition and customer loyalty, which adds value beyond its physical assets.