Goodwill Valuation

If is a special type of intangible assets that represents that portion of the entire
business value that cannot be attributed to other income producing business
assets, tangible or intangible

Generally goodwill may be valued at the time of disposal of business of the firm

The monetary value of the well established firm that a buyer is ready to pay is
termed as goodwill

Goodwill exists for firms having super profits and not normal profit or losses

Goodwill arises at the time of

1) change in the profit sharing ratio amongst existing partnets
2) admission of a new paetner
3) retirement of a partner
4) death of a partner
5) dissolution of a firm where business is sold as going concern
6) amalgamation of partnership firms

Methods of valuation of goodwill

1) Average profit method
Simple average –
Goodwill = average profit X no of years purchase

Weighted average –
Goodwill = weighted average profit X no of years purchase

2) Super profit method

Goodwill = super profit X no of years purchase
Super profit = actual profit – normal profit
Normal profit = capital employed X (normal rate of return/100)

Annuity method
This method considers the time value of money
Goodwill = super profit X discounting factor

3) Capitalization method

Capitalisation of average profits

Goodwill = Normal capital – Actual capital employed
Normal capital or capitalized average profits = average profit X (100/normal rate
of return)
Actual capital employed = total assets (excluding goodwill) – outside liabilities

Capitalization of super profits
Goodwill = super profits X (100/normal rate of return)

Avinash Kulkarni

Chartered Engineer
Govt Approved Valuer
IBBI Regd Valuer

Goodwill Valuation