Goodwill is the Value of the Reputation of a Firm which enables it to Earn Higher Profits in Comparison to the Normal Profits Earned by Other Firms in the Same Trade . The Term Goodwill is generally used to Denote the Benefit Arising from Connections and Reputation.
Factors Affecting the Value of Goodwill :
(i) Favourable Locations of the Business : If the Business is Located at a Convenient or Prominent Place , it will Attract More Customers and therefore will have More Goodwill .
(ii) Efficiency of Management : If the Business is Run by Experienced and Efficient Management, its Profits will go on Increasing, which results in Increase in Value of Goodwill .
(iii) Nature of Goods : If a Business Deals in Goods of Daily Use, it will have Steady Profits as the Demand for these Goods will be Stable. Such Business will have More Goodwill . But if it Deals in Fancy Goods, its Profit will be Uncertain and as such the Value of the Goodwill will be Less .
(iv) Trend of Profit : If the Profits of a Business are Increasing Continuously , the Value of its Goodwill will be More. If the Profits are Declining or if the Profits are Uncertain , the Value of Goodwill will be Less .
(v) Other Factors : Other Factors which affect the Value of Goodwill are :
- Good Industrial Relations .
- Favourable Government Regulations .
- Effective Advertising to Establish Brand Popularity .
- Popularity of Product in Terms of Quality .
Need for Valuation of Goodwill :
The Need for Valuing the Goodwill in Partnership Arises in the following circumstances :
(i) When there is a Change in the Profit Sharing Ratio among the Existing Partners . (ii) When a New Partner is Admitted .
(iii) On Retirement or Death of a Partner .
(iv) When the Firm is Sold .
(v) When the Firm is Amalgamated with Another Firm .
Valuation of Goodwill can be done by the following THREE Methods :
(i) Average Profit Method
(ii) Super Profit Method
(iii) Capitalization Method
