Meaning of Goodwill

Goodwill is a non physical asset associated with the purchase of 1 company by another. Notably, goodwill is maintained in a situation where the purchase cost price is more than the sum total of the fair value of all distinguishable tangible and intangible assets bought in the possession and the liabilities presumed in the procedure. The value of an enterprise’s brand name, solid consumer base, good consumer associations, good employee associations and any patents or proprietary technology represent some instances of goodwill.

Causes affecting the value of Goodwill

The vital factors influencing the value of goodwill are as follows :

  • Character of business: An enterprise that manufactures high value added goods or possessing a solid demand is capable to earn more gains and hence has more goodwill
  • Location: If the trade is centrally situated or is at a place possessing heavy consumer traffic, the goodwill tends to be more
  • Efficiency of management: A well – handled interest normally enjoys the merit of more cost efficiency and productivity. This leads to more gains and hence, the value of goodwill will also be more
  • Market condition: The monopoly situation or limited competition facilitates the concern to earn more gains which leads to the more value of goodwill
  • Advantages: The enterprise that enjoys exceptional merits like low rate and assured supply of electricity, import licences, well-known collaborators, long-term contracts for supply of materials, trademarks, patents, etc., certainly enjoy more value of goodwill.

Need for Valuation of Goodwill

  • Difference in the profit sharing ratio (PSR) amongst the existing partners
  • Admission of new partner
  • Retirement of a partner
  • Death of a partner
  • Dissolution of an enterprise involving sale of business as a trading concern
  • Consolidation of partnership firms

Methods of Valuation of Goodwill

The significant methodologies of valuation of goodwill are mentioned :

  • Average Profits Method
  • Super Profits Method
  • Capitalisation Method

The above mentioned is the concept that is explained in detail about Goodwill for the class 12 Commerce students. To know more, stay tuned to BYJU’S.