4 fundamentals that competitive companies use to establish goodwill
February 13, 2020
By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader
Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.
Driving by a Goodwill location recently got me thinking about the word “goodwill” and its various meanings. One the one hand, goodwill is something one person offers to another through acts of kindness. It’s being helpful, friendly, and doing acts of good for another. On the other hand, it is an important concept in the business world as well, reflecting an important asset of a company regardless of whether it is reflected in the financial statements.
In either case, goodwill is not something you can touch. It is something that touches you. It is invisible yet very real. You know it when you experience it.
In business geek terms, goodwill is the amount of money a buyer of a company pays for another company over its financial book value. Financial book value, also known as equity, is simply the total assets of the company less its total liabilities. For goodwill to be represented in the financial statements, there must have been an acquisition transaction. And then, it only shows up on the financial statements of the buyer. Does that mean that the seller didn’t have any?
From a technical accounting perspective, the seller does not have any goodwill. They won’t reflect goodwill on their balance sheet unless they did an acquisition of their own. Being the nontraditional accountant that I am, however, I believe the seller has tremendous goodwill inherent in their company. Otherwise, why in tarnation would anyone pay them more money for the company than the financial statements say it’s worth?
Let’s break goodwill down to its invisible roots. There are four primary areas that contribute to goodwill — human, customer, structural, and social. My friend, Chris Snider, who authored Walking to Destiny, calls these the “Four Capitals.” Each is powerful despite being invisible and intangible, and if you stand out in any one or more of them, you are building value and future goodwill.
Human: There is no greater or more basic form of goodwill than human capital. How do you treat your employees? Have you built systems, programs, and initiatives to attract, retain, develop, compensate, and motivate your talent pool? Are these programs deeply integrated into the fabric of the organization so that everyone has a common and consistent experience while simultaneously sharing in the desire to accomplish good things for the company? Using the qualitative definition of goodwill, are you being kind, helpful, friendly, and caring toward the workforce?
Customer: As with human capital, creating a common, consistent, and beneficial experience for your customers creates tremendous loyalty, which is extremely valuable. Further, the more you can count on having the same experience with whomever you are interacting with, the better. For example, you will have to pry my iPhone out of my cold dead hands before I’d return an Android platform. I know what to expect when dealing with the products, the company, and the talent — invisible, intangible, real, priceless. There’s goodwill toward others.
Structural: The foundation of any enterprise comes down to the strength of its infrastructure. What are the systems, procedures, policies, and tools that are used to deliver the goods, services, and connections? Are they documented? Is there cross training? Are they followed consistently, with accuracy, competence and quality? Can they be easily replicated by someone new coming in or in another location? McDonalds is my favorite example of strong structural capital. I will bet you a Big Mac that right now, as you read this, you can conjure up the flavor, consistency, and temperature of your favorite item as you roll through the drive through. The script, procedures, and even physical layout is predictable. It doesn’t matter if you are in London, NYC, or Sun Prairie — dollars to doughnuts, the structural experience is nearly identical. Doing acts of goodness, if you will, in a structured, systematic way.
Social: Social capital is your swagger factor. Is your business cool? Are you held in high esteem in the industry, community, and customer views? This one is the hardest to develop, in my opinion, as well as the hardest to hold on to. Let’s face it, even Mick Jagger is losing his swagger. Everything does, so companies need to revitalize themselves and keep themselves fresh as they evolve. Apple has done a nice job in this arena. Social capital has an element of vulnerability that the other capitals do not and that is the fickleness of public opinion. Facebook, for example, was the rising, cool place to be in 2011 but not so much anymore. According to the annual Harris Poll on corporate reputations of America’s top 100 companies, Facebook has gone from the 31st most trusted company in 2011 to 94th in 2019. Their ranking dropped 34 places between 2018 and 2019 alone. From a qualitative definition, are people seeing what you’re doing as good for others?
You have each of these four intangible assets in your company. What you choose to do with them of depends on you, but they are there. It’s your goodwill, using either definition, in waiting. The question for you today is, what are you willing to give?