In layman’s terms good will refers to an attitude that shows or displays a “friendly hope that something will succeed”. In accounting, good will refers to the difference between the purchase price of a company and its net worth. This good will arises from the value of intangible assets that come from the reputation or any other advantage of a business or company.
As an example, if a company is bought by another, all the tangible physical assets (i.e. buildings, equipment, inventory) of that company is listed on the balance sheet. If the value of these assets are added up, that should be the worth of the company. However, the price paid for the company is usually higher than the simple sum of those assets, this is because there is a value placed on intangible assets such as the brand name and reputation, good employee relations, owned patents, and any proprietary technology. The value of these intangible assets is tagged as the good will portion of the balance sheet and accounts for the price difference. As such, good will often arises only when one company is acquired by another.
Although good will is often seen as a positive value, good will can actually be negative. This happens in instances when the cost of acquisition of a company is lower than the actual fair price of the assets of that company. This usually happens if a company is in financial trouble (i.e headed for bankcruptcy or already bankcrupt) and has to sell low in order to survive.