How does the nature of business affect the value of goodwill of a firm?
Answers
Answer:
There are many factors that affect the valuation of goodwill. They are as follows:
1. Location
The business located in a suitable place commands more goodwill than others.
2. Capital
The more, the capital of business, the more chance of goodwill. A firm with a high debt will have to pay more interest from profit of the firm and naturally goodwill will be less.
3. Nature Of Business
A firm with a constant sales has more chance of earning profit and naturally goodwill too.
4. Efficient Management
A good management brings more profits to the business. Increase in the value of goodwill is the result of efficient management.
5. Contract
Firm may enter into a contract of sales for long period. A firm can make more profit on sale of goods on that contract by making purchase on reasonable terms. This lead to increase in the value of goodwill.
6. Patent Right
A firm having patent right for production of goods can earn more goodwill than others.
7. Quality Of The Product
A firm producing qualitative products can easily have name and fame in the market. This lead to increase in the value of goodwill.
8. Government Patronage
The product of an enterprises will be more demand, when it is patronized by government. As a result, the goodwill increases.
9. Other Factors
Besides the factors mentioned above, money market condition, peace in the country, government's policy, tendency of profit etc. also affects the valuation of goodwill.
Answer:
Goodwill is the present value of expected future income in excess of a normal return on the investment in tangible assets or for the excess of price paid for business as a whole over the book value or over the computed or agreed value of all tangible net assets purchased. It is an intangible asset which places an enterprise at an advantageous position due to which the the enterprise is able to earn higher profits without extra efforts.
Factors affecting the value of goodwill:
1. Favourable Location: If the business is located at a favourable place, resulting in increased customer walk in and, thus, increased sales, the value of goodwill will be higher.
2. Access to Supplies: When supplies of materials are difficult to get, there will be a high value of goodwill for a firm which has good arrangements for getting supplies.
3. Quality: If a firm enjoys good reputation for quality of its products, there will be a ready sale and the value of goodwill will also be high.
4. Efficient Management: If the management of the firm is experienced, capable and competent, the firm will not only earn higher profits but will also enjoy increased value of goodwill.
5. Other factors: Other factors like good after sale services, good customer relations and good labour relations also increase the value of goodwill.
Explanation: