Concept and Valuation of Goodwill

Goodwill refers to the reputation or ‘good-name’ which is earned by a firm through the owner’s honesty and hard work. The satisfied customers will come again and again and the firm will be able to earn more profits in future, if at all a firm renders good service to the customers.

value of goodwill in business

Lord Lindley said that goodwill helps to denote the benefit which is arising from reputation and connections.

According to Lord Eldon,  goodwill is not more than the probability which the old customers will utilize in the old place.

Spicer and Pegler said that, “goodwill can be defined as an element which arises from the connections, reputations or other advantages which is possessed by a business which helps it to earn greater profits than the return which is normally expected on the capital which the net tangible assets employed in the business represent.

Characteristics of Goodwill, which are important while taking accounting assignment help, are:-

1.  It is an intangible asset:

Goodwill is considered to be an intangible asset such as trademarks, patents, copy rights, etc. Like other assets, there is no chance of depreciation and even it does not have to suffer wear and tear.

2.  It also known as a valuable asset.
3.  It provides help to earn excess profits.
4.  Its value is liable to constant fluctuations: 

The value of goodwill is not liable to constant fluctuations as it does not depreciate. It declines in the value with decline in earnings and where there are super profits in a business (that is, more than the normal), it is presented as a silent asset.

5.  It is valuable only when the entire business is sold:

Goodwill is not meant to be sold in parts rather it can be sold with the entire business except when a partner is admitted into the firm or is retired from the firm.

6.  It is difficult to determine the exact value of Goodwill: 

The reason for this is that the value of Goodwill may change from time to time because of the altering circumstances which may be external and internal to business.

Students must also keep an eye on factors affecting the Value of Goodwill while going for assignment help:-

1.  Favorable location of the business:

Goodwill will be more if the business will attract more customers and that would happen only when the business is located at a convenient or prominent place.

2.  Efficiency of management: 

The profits in the business will go on increasing if the business is run by efficient and experienced management, which results in the increase in the value of Goodwill.

3.  The Longevity of the business:

The older business is likely to have more Goodwill as it is better known to the customers. The number of customers of new entrants will be less on being compared with the number of customers in a business enterprise which has built up good reputation over a period of time. 

4.  Nature of Goods:

The business will have steady profits if it deals in goods of daily use, as the demand for these goods will be stationary. Such type of businesses will be having more Goodwill. The value of goodwill will be less if it deals in fancy goods, as its profit will be uncertain.

5.  Possession of License:

The goodwill of the firm will be more if it holds an import license because it would be very difficult for the other firms to enter the business in the absence of this license.

6.  Monopolistic and other rights:

The business will have assured profits if it enjoys monopoly market. Similarly, it will have more goodwill if it holds some special rights such as trademarks, concessions, patents, copy rights, etc.

7.  Risk involved: 

The value of the goodwill will be less if there is more risk involved in the business.

8.  Trend of profit:

The value of the goodwill of the business will be more if the profits of the business are increasing continuously. On the contrary, the value of the goodwill will be less if the profits are declining or if the profits are uncertain.

9.  Future competition:

The value of goodwill would definitely reduce due to the likelihood or possibility of increased competition in future.

10.  Capital required: 

The value of goodwill will also be influenced by the amount of capital required for a business. The business with lesser capital requirement shall enjoy more goodwill if two business enterprises earn the same rate of profit.

11.  Other factors:

  • Good industrial relations
  • Favorable government regulations
  • Stable political conditions
  • Research and development affairs
  • Effective advertising to establish brand popularity
  • Popularity of product in terms of quality

Classification of Goodwill that must be understood for effective accounting assignment help, is as follows:-

1.  Purchased goodwill: 

The goodwill which is acquired by making a payment is known as purchased goodwill. The purchased goodwill has some important features which are as follows:

  • It arises when the business is purchased.
  • As consideration is paid for the purchased goodwill so it is recorded in the books of accounts.
  • It is reflected in the Balance Sheet in the form of asset.
  • It also gets depreciated over its useful economic life.

2.  Self-Generated Goodwill or Inherent Goodwill: 

The goodwill which is internally generated and which arises from a number of attributes or characteristics which an on-going business possesses. The important features of self-generated goodwill are as follows: 

  • A self-generated goodwill is generated internally over a long period of time.
  • This type of goodwill cannot have a true cost. The subjective judgement of the valuer helps to take out its value.
  • Accounting Standard 26 (that is, intangible asset) states that it cannot be recorded in the books of accounts as consideration in money or money’s worth is not paid for it.

Thus the above points can be kept into consideration while referring for assignment help on goodwill.