Valuation of goodwill

                                             Valuation of Goodwill
There are four method of valuation of goodwill:

1. Average profit method
2. Super profit mehod
3. Capitalisation method

1.Average profit method:
                     There are two method:
1.Simple average profit method:
                 When profit fluctuates then this method is applied.
   Goodwill =  Average profit * No. of years purchased
     
         Average profit = total profit or loss/ Total no. of years

2.Weighted average profit method:
                   When profit are in trends i.e. either increase or decrease then this method is applied.
    Goodwill = Weighted average profit * No. of years purchased

Weighted average profit = Total weighted profit/ Total weight

  Total weighted profit = Profit * Weight
2.Super profit method:
           Goodwill = Super profit * No. of years purchased
             Super profit = Average profit - Normal profit
              Average profit = Total profit/Total no. of years
          Normal profit = Capital invested * Normal rate of return                                                       / 100

(Normal rate of return is the return which is expected by an investor from his investment.)

3.Capitalisation method: 
                  Capitalisation means how much capital is required to get an estimated profit at normal rate of return.
   under this method goodwill can be calculated on two basis:

• On the basis of Average profit
• On the basis of super profit

 1.Goodwill by Average profit capitalisation method:
            = Average profit * 100/Normal rate of return - Net asset
2. Goodwill by Super profit capitalisation method:
            =Super profit * 100/Normal rate of return

         
     Needs for Valuation of Goodwill:
             There are two cases:
A.In Case of Company:

• At the time of Amalgamation and absorption
• On sale of  company
• When value of shares are not quoted in stock exchange.

B.In Case of  Partnership firm:

• On the admission of a partner.
• On the death or retirement of a partner.
• On alteration of share of profit of the partner.
• On sale of partnership firm.
• On conversion of firm into a company.
• On Amalgamation of firm.