Goodwill is an intangible asset of the company, Which is associated with the purchase of one company by another. Specifically, It is recorded in a situation in which the purchase price is higher than the sum of the fair value of all visible solid assets and intangible assets purchased in the acquisition and the liabilities assumed in the process.
The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples.
According to Lord Eldon___”Goodwill is nothing more than the profitability that the old customers will resort to the old place“.
According to Lord Macraughton___”Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of good name, reputation and connection of a business. It is the attractive force which brings in customers. It is one thing which distinguishes an old established business from a new business at its start”.
To calculate, We should take the purchase price of a company and subtract the fair market value of identifiable assets and liabilities.
Goodwill = P−(A+L)
P= Purchase price of the target company
A= Fair market value of assets
L= Fair market value of liabilities
Factors Effecting Goodwill
- Quality Of Products: Better quality of product will increase the sales and profits which will increase the value of goodwill.
- Efficiency Of Management: A well-handled interest normally enjoys the merit of more cost efficiency and productivity, which will increase the value of goodwill.
- Location of Firm: The better location will attract more customers resulting in an increase in sales and profits which in turn, will result in an increase in the value of goodwill.
- Market Condition: The monopoly situation or limited competition facilitates the concern to earn more gains which leads to the more value of goodwill
- Access To Supplies: If a firm has better access to supplies or assured supply of inputs then it enjoys a better reputation than others and higher value of good-will.
- Special Advantages: If a firm enjoys special advantages like patents, trademarks, brand image, or any other exclusive benefit, then the firm enjoys a higher value of goodwill.
- External resources: After sales service, Research & Development, Effectiveness of Advertisement, the supply of electricity, import licenses, well-known collaborators, long-term contracts for the supply of materials, trademarks, patents, etc.certainly enjoy more value of goodwill.
Need for Valuation of Goodwill
- Admission of a new partner.
- Retirement of a partner.
- Death of a partner.
- Dissolution of an enterprise involving the sale of the business as a trading concern.
- Consolidation of partnership firms.
- Amalgamation or merging of a firm.
- Buying share of the firm.