Goodwill
According to Spicer and Pegler “Goodwill
is said to be that element arising from reputation or other advantages possessed
by the business which enables us to earn greater profit.”
Meaning of Goodwill
In general terms we can say that
Goodwill is a good name and reputation attached to a business which is capable
to earn extra income to the organization. It is intangible asset but not a fictitious
asset to the company. Goodwill can only be realizable only if business
is disposed it means that goodwill exists when we carry out the business and
can even feel the presence but in order to realize it we need to sell the
business. While no one would prefer to sell the goodwill or business name while
running the business thus it will give rise to valuation of goodwill and assess
the goodwill for specific period.
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Reasons for Evaluate the Goodwill
Firstly lets us try to understand the
reasons to evaluate the Goodwill. They reasons are as follows
§ When the company previously has written off goodwill and again wants
to write it back in order to reduce the debit balance in the Profit and Loss Account.
§ When the business has been sold to another entity or when company has
been amalgamated with another company.
§ When stock exchange of quotations not being available, shares have
to be valued for taxation purpose.
§ When a large block of shares such as to enable the holder to
exercise control over the company concerned has to be sold.
§ When one class of shares is to be converted into another class of
shares.
Factors Influencing Goodwill
Now lets us try to understand important factors affecting the value
of Goodwill
§ Personal Skill in Management:
The reputation of company which is built up is due to the skill
displayed in the management. In certain cases skill in management is much more
important than any other thing. The goodwill of a firm which is valued largely
depends on the senior officials and management due to various internal
reasons. Such as when company is sold
the management may not be happy with the acquisition and thus this will lead to
resignations of various officials or management may not give its full potential
in carryout the operations as a result of this the success isn’t assured.
§ Nature of Business:
It covers very vast things. If it is difficult to enter into existing
industry because existing firms enjoying goodwill merely by the fact of
presence of existence. Difficulties may be due to market has reached saturation
or heavy investments in fixed assets or legal difficulties or any other. This
too has also influence on the goodwill of a firm.
§ Favorable Location or Size:
We all can understand the strategic location or size of certain
business as a result of which they have gained a competitive edge over others rivalries.
The company may be benefited by location by importing or exporting or access to
the market or any other factor. The companies may be benefited by size by the
level of operations they are carrying out at present.
§ Access to Supplies
It gives a company a competitive edge which company has an easy
access to the supplies. This will help company in obtaining cost efficiency and also in increasing the operations efficiently.
§ Exceptional Contracts:
The contracts made by the company regarding the supply of goods or services
to the customers will also result in goodwill of the company. The goodwill will
only get created if the contracts are delivering the values for which it is
created or else there will not be any influence on goodwill.
§ Capital Requirements and Arrangements
of Capital:
The amount of capital required will also influence the value of the
goodwill. If the capital required is small considering profits available the
goodwill value will be large or else vice verse.
§ Trade Marks and Patents Protections:
In few industries few patents, trademarks and copywriters
are required to carry out the operations. And if a firm has built reputation
because of the intellectual property rights than the worth of goodwill will be
too large or huge.
Thus many factors
influence to the Goodwill directly or indirectly as a result of which goodwill
will be increase its value or decrease its value. Some other day let’s try to
understand the methods to evaluate the goodwill.
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