Goodwill and business reputation when working with a brand

Goodwill and business reputation play a key role in building a brand and its successful development.

Olga Solotska considered ways to strengthen and maintain goodwill and business reputation, as well as how these two elements can help your brand stand out on the market and gain consumer trust.

Let’s start with the fact that the notions of “business reputation” and “goodwill” are not identical.

For a clear understanding of the term “goodwill” we can familiarize ourselves with its wording in clause 14.1.40 of the Tax Code of Ukraine, where it is indicated that it is an intangible asset, the value of which is determined as the difference between the market price and the book value of the company’s assets as a complete property complex, which arises as a result of the use of better managerial qualities, a dominant position in the market of goods, services, new technologies, etc.

Simply put, there is always a difference between the cost of a business and the net worth of its assets, which is goodwill.

However, goodwill arises only in the case of purchase and sale, reorganization of enterprises and has a clear value characteristic that is present throughout the entire period of operation of the company and cannot be reliably determined.

The European Court of Human Rights in 1986 in Van Marle & Ors v The Netherlands (1986) 8 EHRR 483 recognized that goodwill can be an element of the economic value of a company and is an integral part of the assets held by the company.

There is no single definition in Ukrainian legislation regarding the notion “business reputation”. For example:

  • Article 2 of the Law of Ukraine “On Banks and Banking Activity” defines that business reputation is information collected by the National Bank of Ukraine about compliance of the activities of a legal entity or an individual, including managers of a legal entity and owners of a significant share in such a legal entity, with the requirements of the law, business practices and professional ethics, as well as information about the decency, professional and managerial abilities of a natural person;
  • Article 1 of the Law of Ukraine “On Financial Services and Financial Companies” defines that business reputation is a set of documented information collected by the regulator about a natural or legal entity, which makes it possible to conclude that its activities comply with the requirements of legislation, business practice and professional ethics, as well as information about the professional and managerial abilities of an individual;
  • In the Information Letter of the Higher Economic Court of Ukraine “On some issues of the practice of application of information legislation by economic courts” dated 03/28/2007 No. 01-8/184, it is stated that “the business reputation of a legal entity is the prestige of its corporate (commercial) name, trademarks and other intangible assets belonging to it among the circle of consumers of its goods and services”.

A common feature of goodwill and business reputation is the provision of profit to companies in the future, which exceeds the market value of the profit of companies with a similar subject of economic activity.

The Supreme Economic Court of Ukraine points out the relationship between the business reputation of a legal entity and goodwill: the monetary equivalent of business reputation can be expressed in the form of goodwill, which is an intangible asset arising from the use of better managerial qualities, a dominant position on the market of goods (works, services ), new technologies, etc.

Goodwill, which includes the business reputation of a legal entity, is formed as a result of the use of trademarks in the production and sale of goods, customer service, advertising, social responsibility, etc.

The business reputation of a legal entity as a component of goodwill is an assessment of the company by consumers (buyers), business partners, state authorities, mass media, based on information about the quality of goods (services), compliance with legislation, contractual obligations, honest business practices.

The reputation of a legal entity and its trademarks are combined by the common function of individualization of the manufacturing company.

Material carriers of the reputation of a legal entity are the commercial name, a mark for goods and services, other means of individualization, the goods themselves, their advertising and any communication with the consumer. The listed objects are the subject of offenses that consist in improper use of reputation.

Due to the close connection between goods and marks, the latter provide the public with information about the goods, and help mark owners to stimulate and maintain demand for these goods.

A trademark that is intensively used and has gained a reputation among consumers has three main functions: (1) recognition; (2) warranty and (3) advertising.

The recognition function is the ability to identify the product and allow the consumer to recognize this mark and the product among homogeneous products of different manufacturers. The sign helps the owner in the sale of goods, and the consumer – in choosing them among similar ones.

The guarantee function is the ability of the mark to symbolize quality and trust, which allows buyers to use the mark to choose a product. Buyer loyalty is based on the expectation that all products under a certain brand are of the same high quality.

Advertising function is the ability to sell a product to new customers. A popular trademark attracts new buyers thanks to the information, stimulates interest in the brand’s novelties, and tends to recommend the goods of this brand to other buyers.

The average consumer reasonably places responsibility for the quality of the goods on the owner of the trademark and the manufacturer of the goods (these persons may not coincide, but if the manufacturer uses the mark with the consent of the owner, who controls the quality of the goods, this corresponds to the functions of the mark). If the seller misleads the buyer about the quality of the product and its characteristics, first of all, such actions harm the owner of the trademark. Secondly, it causes consumer complaints against the product manufacturer or its local representative, who provides warranty service.

Therefore, we can conclude that the relationship and interdependence between intellectual property rights, goodwill, and business reputation can be clearly traced.

A business entity’s positive business reputation gives it advantages in competition, contributes to the creation of stable demand for products, and thus to obtaining stable profits. The trademark is a factor and a material carrier of business reputation, together they affect the value of goodwill, which is the conditional value of the company’s intangible capital in general.

It is worth remembering that it is reliable protection of intellectual property rights that contributes to the strengthening of business reputation, and vice versa, violation of intellectual property rights (for example, improper use of trademarks) causes damage to goodwill and business reputation.