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    Valuation of Goodwill by Arjun Singh

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    arjun
    This document provides an overview of goodwill valuation for a team presentation. It defines goodwill and lists factors that affect goodwill value. It then describes three methods for valuing goodwill: [1] the average profits method, [2] super profits method, and [3] capitalization method. For each method, it gives the calculation used and provides a solved example to illustrate how to use the capitalization of super profits and annuity methods to value goodwill for a partnership firm.

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    Valuation of Goodwill by Arjun Singh

    Uploaded by

    arjun
    49 views15 pages
    This document provides an overview of goodwill valuation for a team presentation. It defines goodwill and lists factors that affect goodwill value. It then describes three methods for valuing goodwill: [1] the average profits method, [2] super profits method, and [3] capitalization method. For each method, it gives the calculation used and provides a solved example to illustrate how to use the capitalization of super profits and annuity methods to value goodwill for a partnership firm.

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    This document provides an overview of goodwill valuation for a team presentation. It defines goodwill and lists factors that affect goodwill value. It then describes three methods for valuing goodwill: [1] the average profits method, [2] super profits method, and [3] capitalization method. For each method, it gives the calculation used and provides a solved example to illustrate how to use the capitalization of super profits and annuity methods to value goodwill for a partnership firm.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    49 views15 pages

    Valuation of Goodwill by Arjun Singh

    Uploaded by

    arjun
    This document provides an overview of goodwill valuation for a team presentation. It defines goodwill and lists factors that affect goodwill value. It then describes three methods for valuing goodwill: [1] the average profits method, [2] super profits method, and [3] capitalization method. For each method, it gives the calculation used and provides a solved example to illustrate how to use the capitalization of super profits and annuity methods to value goodwill for a partnership firm.

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    You are on page 1of 15

    A PRESENTATION ON

    GOODWILL VALUATION

    By Arjun And Co. Teammates


    TEAM MEMBERS
    ARJUN
    ABHISHEK GUPTA
    ROHIT SHARMA
    HIMANSHU RAJ
    BABU KRISHNA JAISWAL
    GOODWILL??
    Goodwill is the value of the reputation of a
    firm built over time with respect to the
    expected future profits over and above the
    normal profits. Goodwill is an intangible
    real asset which cannot be seen or felt but
    exists in reality and can be bought and sold.
    FACTORS AFFECTING THE VALUE OF
    GOODWILL
    1. The profitability of company is past and expected
    profit in future will affects value of Goodwill
    2. Capital Employed to earn profit
    3. The yield from business as expected by the
    investors
    4. The longevity of existence of business concern
    5. Market share of products of entity
    6. Quality of services rendered
    7. The edge of concern over its competitions in the market
    8. Relationship between management and staffs
    9. Location of business enterprise
    10. Brand position and efforts taken to establish brand of the
    concern
    11. Technical innovation, modern technology, patents, etc,
    12. Tax Planning
    13. Relationship with Government, Local Bodies
    14. There are some other factors affecting the value of
    Goodwill.
     Goodwill Valuation

    • A well-established firm earns a good name in


    the market, builds trust with the customers and also
    has more business connections as compared to a newly
    set up business. Thus, the monetary value of this
    advantage that a buyer is ready to pay is termed as
    Goodwill. The buyer who pays for Goodwill expects that
    he will be able to earn super profits as compared to the
    profits earned by the other firms. Thus, goodwill exists
    only in the case of firms making super profits and not in
    the case of firms earning normal profits or losses.
    Goodwill is recorded in the books only when some
    consideration in money or money’s worth is paid for it. Thus,
    in the context of a partnership firm, the need for valuation of
    goodwill arises at the time of:

    Change in the profit sharing ratio amongst the existing


    partners
    Admission of a new partner
    The retirement of a partner
    Death of a partner
    Dissolution of a firm where business is sold as going
    concern.
     Amalgamation of partnership firms
    Methods of Valuation of Goodwill

    1. Average Profits Method.


    a) Simple Average
    b) Weighted Average
    2. Super Profits Method.
    c) Super profit of the firm.
    d) Annuity method
    3. Capitalization Method.
    e) Capitalization of Average Profits
    f) Capitalization of Super Profits
    Average Profits Method

     Simple Average: Under this method, the goodwill is valued at the agreed
    number of years’ of purchase of the average profits of the past years. 
    Goodwill = Average Profit x No. of year’s of purchase

     Weighted Average: Under this method, the goodwill is valued at an


    agreed number of years’ of purchase of the weighted average profits of
    the past years. We use the weighted average when there exists an
    increasing or decreasing trend in the profits giving the highest weight to
    the current year’s profit.
    Goodwill = Weighted Average Profit x No. of years’ of purchase
    Weighted Average Profit = Sum of Profits multiplied by
    weights/ Sum of weights
    Super Profits Method
     The Number of Years Purchase Method: Under this method, the
    goodwill is valued at the agreed number of years’ of purchase of
    the super profits of the firm.

    Goodwill = Super Profit x No. of years’ of purchase


    # Super Profit = Actual or Average profit – Normal Profit
    # Normal Profit = Capital Employed x (Normal Rate of
    Return/100)

     Annuity Method: This method considers the time value of money.


    Here, we consider the discounted value of the super profit.
    Goodwill = Super Profit x Discounting Factor
    Capitalization Method

      Capitalization of Average Profits: Under this method, the


    value of goodwill is calculated by deducting the actual
    capital employed from the capitalized value of the average
    profits on the basis of the normal rate of return.

    Goodwill = Normal Capital – Actual Capital Employed


    # Normal Capital or Capitalized Average profits =
    Average Profits x (100/Normal Rate of Return)
    # Actual Capital Employed = Total Assets (excluding
    goodwill) – Outside Liabilities
     Capitalization ofSuper Profits: Under this method, Goodwill is
    calculated by capitalizing the super profits directly.

    Goodwill = Super Profits x (100/ Normal Rate of Return


     Solved Example on Methods of Goodwill Valuation

     Q1. M/s Mehta and sons earn an average profit of rupees 60,000 with
    a capital of rupees 4,00,000. The normal rate of return is 10%. Using
    capitalization of super profits method calculate the value the goodwill
    of the firm.

    Ans: Goodwill = Super profits x (100/ Normal Rate of Return) = 20,000 x


    100/10 = 2,00,000.

    Working notes:
    (1). Normal Profit = Capital employed x Normal Rate of Return/100 = 
    4,00,000 x 10/100 =  40,000
    (2) Super Profit = Average Profit – Normal Profit = 60,000 – 40,000 =
    20,000
    Q 2. M/s Joe and John is a partnership firm with Joe and John as its partners. They now
    decide to admit James in the firm and hence need to value goodwill. Capital employed
    is 5,00,000 at the end of the 4th year. The normal rate of return is 15%. Assume the
    interest rate is equal to the Normal Rate of Return. Calculate Goodwill using Annuity
    Method. Their profits for the last 4 years are:
    Year Profits
    1 100000
    2 120000
    3 150000
    4 200000

    Ans: Goodwill = Super Profit x Discounting factor =  67500 x 2.855 = 192713

    Working notes:

    (i) Average Profit = Sum of profits / No. of years = 570000/4 = 142500


    (ii) Normal Profit = Capital employed x (Normal Rate of Return/100) = 500000 x
    (15/100) = 75000
    (iii) Super Profit = Average Profit – Normal Profit = 142500 – 75000 = 67500

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