Goodwill

Goodwill has been defined as, “The benefit and advantage of the good name, reputation and correction of a business with its customers, suppliers, and distributors.” It is often referred to as the attractive force, which brings in custom.

Goodwill as the subject of proprietary rights cannot exist by itself.  It has no independent existence apart from the business to which it is attached. The most obvious form of goodwill is seen as the name sign or trade marks under which a business trades and by which it is recognized in the market place.

In franchising, a franchiser by building a successful brand through marketing, good practice and innovation creates goodwill which is utilised by the franchisees to further give the goodwill and add value to the business. The franchisee will undoubtedly pay for this attractive force and the immediate customer recognition that it brings to a “new” business in the franchise arrangement.

In most agreements new franchises will have limited reputation or goodwill and the payments they be minimised.  As the business grows and market recognition increases, the goodwill coming to the business will also increase.  Consequently, there is a stronger attractive force bringing with it more custom, and the payments for even new entrants will be substantially greater than for earlier franchisees.

Goodwill therefore is an important component when valuing a business and should be evaluated and protected.  Goodwill can be most easily be defined and protected by gaining Registered Trade Marks for the trading name and logos of the franchise, and even in some cases for the shapes and colours of its goods.  Goodwill may also be protected by asserting copyright relating, to manuals, advertising and marketing brochures, recipes, management and accounting software and even the design and layout of shop premises, the design of employees uniforms and TV ads.