Need for the valuation of goodwill

The valuation of the Goodwill of a sole proprietorship is done when the business is being sold, but in case of a partnership firm and a joint stock company goodwill can be sold to some another business entity without selling the whole business. Hence when you are going to sell the goodwill of your business, you should be assured of the value of your goodwill at that particular time.

Methods of valuation of Goodwill

There are three methods of valuation of goodwill of the firm; 1. Average Profits Method 2. Super Profits Method 3. Capitalisation Method   1. Average Profits Method: Under this method goodwill is calculated on the basis of the average of some agreed number of past years. The average is then multiplied by the agreed number of years. This is the simplest and the most commonly used method of the valuation of goodwill. Goodwill = Average Profits X Number of years of Purchase Before calculating the average profits the following adjustments…