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Unit 11: Valuation of Goodwill

11.2.1 nature of goodwill notes

For the determination of the nature of goodwill it would be better to discus the case Whiteman
smith motor company vs. chaplin in which types of goodwill were zoologically classified by
Justice Rich into four as:
1. Cat’s Nature Goodwill: One of the characteristics of a cat is that it likes to live in one place
and does not change its living place occasionally. Therefore, it is said that a cat prefers a
place to a person. It represents the customer who goes to a particular place to the person
who keeps it. Thus, the nature of some business is like the nature of a cat. Good-will of such
type of business does not change due to the change of ownership of the business. The value
of goodwill of such types of business is always higher due to its stability.
2. Dog’s Nature Goodwill: A dog is famous for its faithfulness towards its owner. A dog is
always attached to its owner rather than a place. The goodwill of some business depends
on the owner of the business. If the owner of the business is changed, goodwill of that
business will vanish. In other words, customers are attached to the owner. Such type of
goodwill of the business is called dog’s nature goodwill.
3. Rat’s Nature Goodwill: One of characteristics of the rat is that it does not have any
attachment to a place. It moves from place to place. If the goodwill of a business often
changes, such type of goodwill is rat’s nature goodwill.
4. Rabbit’s Nature Goodwill: One of the characteristics of a rabbit is propinquity. Propinquity
means nearness in time and place relationship. Due to this nature it is trouble-some for a
rabbit to go elsewhere. If goodwill of a business has such type of nature, it is known as
rabbit’s nature goodwill.

Did u know? Average future maintainable profit or average profit is also known as expected
profits.

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Caselet cogent valuation – asset approach

ith respect to the asset approach, the partners of the subject law firm requested
that we investigate the intangible value (goodwill value), if any, of perceived
Woff-balance sheet intangible assets, such as the name and reputation of the firm
(i.e., “brand equity”), the client relationships, and the trained and assembled workforce.
None were deemed to have intangible value for the firm, based on the following
observations. From a nation-wide survey of law firms, we determined that the subject law
firm’s billing rates were just below the average for the surveyed firms. Thus, clients were
not willing to pay premium rates for the firm name (nor for the individual practitioners
at the firm), and the firm did not generate earnings in excess of those of the average firm
surveyed. Regardless, the name and reputation of a law practice is directly related to the
expertise and reputation of the leading attorneys at that practice. Therefore, any goodwill
attributable to name and reputation is linked to the individual attorneys, as opposed to the
firm. Consequently, the firm name often dissolves withers or changes as senior partners
leave a firm or as certain attorneys become senior partners.
Typically, clients are loyal to talented attorneys, not to their law firm affiliations. Attorneys
cannot sell or transfer clients. Clients have the liberty to make decisions concerning legal
advisors. Even without significant departures among senior partners, the subject law firm
experiences a client turnover ratio of about 45.0% for the top clients and 30.0% for the entire
Contd...

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