Operating business value: re-thinking goodwill in the 21st century

Debra Osborn

Research output: ThesisMaster's Thesis

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This thesis advances a rights-based theory of goodwill which contends that for legal purposes, goodwill is a bundle of rights and privileges enjoyed by the owner of an operating business, central to which is the proprietary right to make use of all that constitutes the attractive force of the business to generate earnings or otherwise create value. This ‘attractive force’ includes everything which adds value to the business and not merely the attributes of the business which can be shown to attract custom. Rather it is all of the assets, advantages and positive attributes of the business working together which bring about the attractive force and result in earnings being generated and value being created. On this ‘added value’ approach, goodwill is legally present in every business which is operating and generating revenue with the expectation that this will continue, regardless of the source of its custom, and irrespective of whether the business is profitable or has excess value in an accounting sense.

The thesis contends that a rights-based legal theory of goodwill is consistent with the reasoning of the majority in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 and importantly, reconciles a number of perceived inconsistencies in the decision concerning the role played by custom. It argues that reconciling these anomalies is critical because their existence has seen two conflicting judicial approaches to goodwill emerge, both of which purport to find their authority in Murry. This has been most observable in the taxation area when courts are regularly called upon to resolve matters involving questions of substantial liability to stamp duty and where the existence and value of goodwill is often a determining factor.

The thesis traces the history of goodwill as a legal concept and identifies the significant findings of the majority in Murry concerning the nature, existence, sources and value of goodwill for legal purposes. It examines the cases which have struggled to apply the decision in the face of residual uncertainty about the inseverable nature of goodwill, the role played by custom, and where the critical distinction between the existence and value of goodwill is not well understood. The thesis addresses this uncertainty, clarifies the role played by custom, and explains the relationship between the rights-based legal concept of goodwill and the value-based accounting concept.

Finally, the thesis submits that the existence of the bundle of rights and privileges is the reason why an operating business which is generating revenue and is expected to continue to do so, will usually possess excess value in an accounting sense. To demonstrate the point, the author uses the actual sale of an interest in the Gove bauxite and alumina joint venture business to identify with some particularity the benefits its purchaser obtained by reference to the costs, delays and risks it avoided by acquiring the operating business rather than the business’s identifiable assets only. When those costs, delays and risks are quantified, it is not difficult to understand why sophisticated purchasers are often prepared to pay amounts for a business far in excess of the value of its underlying assets in order to acquire the rights and privileges which the law recognises as goodwill.

Original languageEnglish
Publication statusUnpublished - 2012


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