Valuation of Goodwill
When a business is able to earn profits at a rate higher than that atwhich a similar business earns, the former business is said to possessgoodwill. Goodwill is, therefore, an invisible asset by the possession ofwhich a business can enjoy super earning. Since it is invisible thegoodwill is called an in tangible asset. But since its existence can befelt through superior earning power it is a real asset.There are several causes for which a business may have a goodwill andsome of them are:(1)Possession of a large number of profitable contracts ; (2)Suitablenature of the business ; (3)Exclusive franchise ; (4)Protected valuablepatents and trademarks ; (5)Suitable location of the business ;(6)Idealwindow dressing ; (7)Government patronage ;(8)Reputability,respectability and reliability of the proprietor or partners or trustees; (9)Special ability and skill of the persons in management, etc.In case of transfer of business, separation of the partners from thebusiness due to retirement, death, etc, assessment of the value of thebusiness for any reason, goodwill may have to be valued.
Methods of Valuation of Goodwill
There are various methods for valuation of goodwill of a business ofwhich the following are of common use:
(1) Few years· Purchase of Average Profits Method:
Under thismethod goodwill is valued on the basis of an agreed number of years·purchase of the average maintainable profit. The word maintainable