valuation of goodwill

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GOODWILL: Goodwill is the value of the reputation of the firm which the business builds up due to its efficient service to its customers and quality of its products. According to Lord Eldon- Good will is more than the profitability , that the old customers will resort to the old place.

Factors influencing the value of goodwill:

Factors influencing the value of goodwill Nature of the business Favorable location of the business Efficiency of management Possession of a large no. of profitable contracts Protected valuable patents and trademarks Monopoly in trade Competition for the goods produced in the market

Need for valuation of goodwill:

Need for valuation of goodwill

In the case of sole proprietorship:

In the case of sole proprietorship At the time of sale of business At the time of death of the proprietor At the time of admitting a person as a partner If it is converted into company

In the case of partnership firm:

In the case of partnership firm Change in profit sharing ratio Admission of a partner Retirement of a partner Death of a partner Amalgamation of two partnership firms Conversion of partnership firm to a company

In case of a company:

In case of a company Amalgamation of companies Absorption of a company Reconstruction of a company When shares are to be acquired by a holding company

Methods of valuation of goodwill:

Methods of valuation of goodwill Average profits method Super profits method Capitalization method

Average profits method:

Average profits method Under this method goodwill is valued on the basis of an agreed number year's purchase of the average profit. Value of goodwill= (Avg profit)(Agreed no of yr’s purchases)

Super profits method:

Super profits method Under this method average super profit is ascertained. The excess of estimated future profits over normal profits is called super profit. In other words super profits represent extra profits obtained by a firm in comparison with the normal rate of return in the industry of which the firm is a constituent part. Value of goodwill= (Avg Superprofit)(Agreed no of yr’s purchases)

Capitalization method::

Capitalization method: According to this method , goodwill is equal to the difference of capital required and actual capital employed. If a firm earns more profit by investing lesser amount of capital as compared to other firms ,it will have goodwill. Goodwill=Capital required-Capital employed


conclusion Good will exists in every business earning good profits. It is inseparably linked with the business. It is the attractive force which brings in customers . It distinguishes an old established business from a new business at its first start.



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