Goodwill is the commercial advantage that a business organisation has over its competitors.
There are some factors that pave the way for goodwill in an organisation. These include
1. Personal integrity of the partners
2. Use of well-known business name
3. Possession of a trade mark
4. Level of monopolistic power possessed by the business organisation
5. Good (strategic) location of the business firm
6. Employment of highly-skilled employees
7. Quality of goods sold or services rendered
Types of goodwill
There are two types of goodwill – inherent goodwill and purchased goodwill.
Inherent goodwill
This is goodwill that is generated internally within the business firm
Purchased goodwill
Purchased goodwill occurs from the purchase or takeover of another business firm. Here, the value of the goodwill is the excess of the purchased consideration over the net tangible assets of the firm purchased or taken over.
Goodwill adjustment
There are some situation where the book value of goodwill of a business firm is to be adjusted (upwards). This happens where there is
a) Change in profit sharing ratio
b) Admission of new partner(s)
c) Death or retirement of (partner(s)
Calculation of goodwill
There are different methods of calculating goodwill. These are treated below.
Purchase of average profit
There are different methods of calculating goodwill. Click here to get worked examples on goodwill
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