The Importance of Goodwill
12 November 2012
What makes a licensing or franchising business truly valuable? Revenues, assets, profits, and the like are all fairly simple to comprehend from the company’s financial statements. But assessing the true value of a business is a tough task.
This is peculiarly the case when a business unit is sold or changes hands. Have we ever wondered as to why is it that two seemingly identical businesses sell for different amounts or are valued differently? The answer is the difference in the goodwill associated with the two businesses.
In general terms, goodwill has been defined as the benefit and advantage of a good name and reputation of a business which is the driving force behind attracting and retaining customers. Goodwill has a great role to play in both licensing and franchising business arrangements and is usually listed on the company balance sheet.
A well-recognized and reputed trademark can become a business asset of immense value. It is vitally important to companies that rely on conducting business using their intellectual property. Fast-moving consumer goods companies often have a large amount of assets listed as goodwill, since they spend aggressively to obtain and guard their patents and trademarks for their popular consumer brands. Goodwill, therefore, is an important component when assessing and evaluating a business and should be rightly and fiercely protected.
Goodwill always exists in conjunction with a business to which the same is attached, represents uniform quality goods and services from a particular source, but at the same time has no independent existence and usually develops as a result of strong positive consumer recognition and association.
In brand licensing and franchising the most relevant form of goodwill is the business goodwill associated with the trademarks under which a business operates and by which it is known in the commercial market and recognised by consumers.
In franchising, a franchisor, by building a successful brand through marketing plans, good advertising practice and innovation, creates goodwill which is utilised by the franchisees to further enhance the goodwill and add value to the network of the business. Goodwill can be readily protected by obtaining a trademark registration for the trading name or style and logos of the franchise, and also for the shapes, designs, patterns and color combination of its goods and copyright registrations for artistic works such as menus, brochures, advertising materials, procedural manuals, promotional publications, the decor and settings of the business unit, the staff uniform and even the design on the crockery which is typical of the business.
Goodwill created by the use of the mark by a licensee must pass to the licensor rather than the licensee and should be solely used to the licensor’s benefit. A trademark license agreement therefore should include a formal renunciation of goodwill by the licensee.
Franchising systems are mostly designed to enhance the goodwill of the franchised product or services. A trademark which has been licensed to various franchisees is most likely enhanced by increased sales of the products or services, extensive advertising and the other beneficial activities that ultimately results in increased name recognition.
It is known that in a franchise arrangement, the franchisee automatically has access to a lucrative force and the instant customer recognition that it brings to a novice business. New franchisees usually have limited goodwill associated with them.
However, as the business expands and grows, so does the market recognition and the goodwill associated with the business.
The owner of an already-recognised trademark is more likely to lure business partners willing to make an investment because of their desire to market goods or services under an already established and well known brand with goodwill.
It may be noted that while goodwill is an intangible asset of any business, the failure to maintain the set quality standards which consumers expect as discussed in the last part of this series may directly lead to a dilution of the goodwill of the brand earned through years of marketing activities and numerous efforts and planning.
Negative goodwill is recognised as a liability. Therefore, protecting the goodwill of any licensing and franchising business must at all times be the major concern of the owner ultimately leading to adding value to the business for all purposes.
Lall Lahiri & Salhotra
LLS House, Plot No. B-28,
Sector - 32, Institutional Area,
Gurgaon - 122001, National Capital
Region, India
T: +91 124 2382202, 2382203
F: +91 124 4036823, 2384898
E: Rahul@lls.in
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