Normally, people are not aware about the goodwill. And they sell their business to other person without doing proper valuation of business. So that, in this article we gives you a best ideas about the meaning of goodwill. And how valuation of goodwill is done. Why Necessity for Goodwill Valuation is require in the business.
When you selling your business, then you should value of your assets and liabilities. At the same time, you also require to value your Goodwill.
Basically, person are running their business with two type of assets.
- Non-Current Assets
- Current Assets
Non-Current Assets includes fixed assets, Intangible assets and Long term Investment. Where, Intangible Assets includes goodwill, patents, Copyrights, Trademark etc.
Intangible Assets means those assets which are not seen but they have a value in the market. Its invisible assets. For example, goodwill, patents.
Meaning of Goodwill
In simple term, Goodwill is an Intangible asset showing the value of a business’s reputation.
You earn profit higher than expected profits, extra profit will be your Goodwill of your business.
If some firm have a fixed consumer group than they have earn an extra profit as compare to other firm. So, it can be said that firm have a goodwill.
Value of goodwill depends on earning capacity of firm. Thus, firm has a loss than it can be says that firm doesn’t have a goodwill?
Necessity for Goodwill Valuation
Generally, valuation of goodwill is require at the time of selling of business. And, also at the time of amalgamation and merger of the company.
Here, amalgamation means when two or more partnership firm join together and start a new firm or company.
So, there are many situation arise in partnership firm where, valuation of goodwill is require. We will try to gives you all the situation for your reference where, valuation is require. Following are some of them.
- New partner enter in the partnership firm.
- Some partner retire from current partnership firm.
- When partner’s death from current partnership firm.
- Conversion of partnership firm into company.
- Amalgamation of partnership firm.
Methods of Goodwill Valuation
Now, questions arise how valuation of goodwill is done. Thus, there are Pre-determine Methods for Goodwill Valuation. There are four method for valuation.
- Average Profit Method.
- Weighted Average Profit Method.
- Super Profit Method.
- Capitalization of Profit Method.
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