Goodwill – High Court of Australia

Commissioner of State Revenue and Placer Dome Inc [2018] HCA 59

The High Court of Australia in its decision in the above case has some clear defining of how the law views Goodwill. It is different to that of accounting which is essentially viewed as “essentially subjective, reflecting the excess that a purchaser is willing to pay for a business or the discount a seller is willing to accept for the same. In this sense, it is essentially a balancing item”.

Further, categories such as personnel; technological capabilities; innovative mining techniques; management; size, structures and systems; ability to harvest efficiencies and economies of scale; ability to expand its business; “synergies”; and going concern value are not seen as factors to be considered in ‘Goodwill’.

Goodwill for Legal Purposes – High Court

“Goodwill for legal purposes does not extend to every positive advantage, and whatever adds value, including privileges or advantages that differentiate an established business from a business just starting out. Goodwill for legal purposes does extend to those sources which generate or add value (or earnings) to the business by attracting custom, whether that be from the use of identifiable assets, locations, people, efficiencies, systems, processes, or techniques of the business, or from some other identifiable source. And those sources of goodwill for legal purposes have a unified purpose and result – to generate or add value
(or earnings) to the business by attracting custom.”

Economic View of Goodwill – High Court

“That legal view of goodwill is reinforced by, and is not inconsistent with, the economic view of goodwill. In economic terms, goodwill acts on demand Economists recognise that goodwill increases demand for a business’ goods or services, which, in turn, enables the business benefiting from the goodwill to sell more, increase its price, or both, whilst at the same time recognising that demand may be increased by any number of factors which would not qualify as goodwill, such as product differentiation.

The basic underlying principle of goodwill for economists has been described as reciprocity where the attention is focused on the things that the buyer receives from the seller but which the buyer cannot demand as part of the transaction and on the things which the seller receives from the buyer which the seller cannot demand as part of the transaction. The premise underlying “reciprocity” is that the provision of these items by one party to the other party “builds up in the mind of the receiving party some goodwill felt towards the other party. The greater the provision, the greater the increase in the stock”.

This underlying principle of goodwill for economists – that of “reciprocity” or factors that increase demand – is analogous to that which underpins goodwill for legal purposes, namely “custom”. As Commons, a leading economist in the 1920s, explained, “goodwill can be seen and felt – seen not in commodities, but in the transactions of business; and felt, not in consumption and production, but in the confidence of patrons, investors and employees”

Summary – Negotia Group’s View

Goodwill in a business, in our view, relates to the legal understanding of Goodwill. Goodwill relates to ‘custom’. It is about those things that the business has and employs to generate income. Assessing the risks associated with generating future income is largely based on the sound, realistic judgement(s) of the future income level(s) of the business and the risks associated with generating that income. Those risks are found by investigating the physical nature of the business and the environment in which it operates. Business risk cannot be assessed with any credibility by the arbitrary selection of a Return factor (%) (or multiplier) of a profit level.

If you need more information, or need a business sold or a business valuation, talk to us

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1300-551-757

info@negotia.com.au

Alternatively, refer to Commissioner of State Revenue and Placer Dome Inc [2018] HCA 59

Disclaimer: The views expressed in this article are those of the Writer. The information is not meant to be exhaustive. Readers are responsible for making their own inquiries and assessments as to the truth and accuracy of all the information given and should seek advice from professionals. No liability (in contract, tort or otherwise) will be accepted for any loss or damage incurred as a result of reliance upon any material contained in this publication or any information or advice provided in this publication or incorporated in it.

Kevin Lovewell
M: 0401 308 385
P: 1300 551 757
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Member & Registered Business Valuer
Australian Institute of Business Brokers