Goodwill is defined as the present value of a firm's anticipated excess earnings. The value of goodwill is affected by factors like location, nature of business, management efficiency, time, market situation, and special advantages. Goodwill needs to be valued when there are changes in profit sharing ratios, admissions or retirements of partners, dissolution of the firm, or amalgamation. Common methods to value goodwill include the average profit method, weighted average profit method, super profit method, capitalization method, and present value of super profit method. The sacrificing ratio is the amount of profit share old partners agree to sacrifice for an incoming partner.
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Factors Affecting Goodwill Valuation in Business
1.
2.
3. DEFINITION OF GOODWILL
Goodwill can be defined as, the
present value of a firms
anticipated excess earnings
4. FACTORS AFFECTING THE
VALUE OF GOODWILL
1. Location
2. Nature of Business
3. Efficiency of Management
4. Time factor
5. Market Situation
6. Special advantages
5. NEED FOR VALUATION OF GOODWIL
Need for valuation arises under the following
circumstances.
Change in profit sharing ratio
Admission of a partner
Retirement of a partner
Death of a partner
Dissolution of a firm
Amalgamation of Firm
6. METHODS OF VALUATION OF
GOODWILL
1) Average profit method
2) Weighted average profit method
3) Super profit method
4) Capitalization method
A: Capitalization of average profit
B: Capitalization of super profit
5) Present value of super profit
7. SACRIFICING RATIO
The ratio in which the old partners have agreed to
sacrifice their share of profit in favour of the
incoming partner is called the sacrificing ratio
