Describe what is meant by the term \"goodwill.\" Solution Definition That part of business value over and above the value of identifiable business assets. Meaning Business goodwill is a key intangible asset that represents the portion of the business value that cannot be attributed to other business assets. Put differently, business goodwill reflects the synergy among the various assets used by the business to produce income: in a well-run business the whole is greater than the sum of the parts. Here are the key factors that contribute to the creation of business goodwill: How to value business goodwill Going concern value indicates the existence of business assets ready for use in producing business income. The value is created because a business can effectively apply its capital (financial resources and equipment), labor (employees), and coordination (management) to produce economic benefits for its owners. Excess business income implies the existence of earnings above a fair return on all the other business assets. The idea is that this excess income is due to business goodwill. Owners may believe that the business has additional value because they see it as being able to create new products and services, attract new customers, and acquire or merge with other businesses. Types of business goodwill For the purposes of small business valuation, you may be interested in these types of business goodwill: Institutional goodwill is associated with the business, its position in the marketplace and its ability to effectively serve its customers. Professional practice goodwill, as the name implies, is associated with professional practices such as doctors, lawyers, CPAs, architects, engineers and other professional services. Unlike business goodwill, the professional practice goodwill has two components: Practitioner goodwill relates to the skill and reputation of the individual professional practitioner. Practice goodwill, much like the business goodwill, arises from the professional practice itself, its institutional reputation, location, track record and operating procedures that make it an effective service provider that can produce superior income. Accounting view of business goodwill From the accounting perspective, business goodwill is generally recorded only if it is acquired as part of a business or professional practice purchase. The typical way the accountants handle business goodwill then is by subtracting the fair market value of the business tangible assets from the total business value. Note that this definition of business goodwill captures all intangible business assets, not just the goodwill. Economic view of business goodwill A quantitative view of business goodwill adopted by the economist is that it equals the capitalized value of the business earnings in excess of the fair return on all the other business assets, both tangible and intangible. This view seeks to establish the value of all identified business assets by allocatin.