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Unit 11: Valuation of Goodwill

11.3.1 special features of goodwill notes

Goodwill of a business has some special features, and is therefore distinct from other assets.
These features are as follows:
1. Goodwill of a business can be positive or negative in value. When the purchase consideration
of a business is more than its net assets, there will be a positive goodwill. If purchase
consideration is less that net asset, there will be negative goodwill which is also known as
capital reserve.
2. There cannot be the valuation of all its components separately, which contribute to
goodwill.
3. Value of goodwill changes time to time with changes in the factors of goodwill which will
be explained later.
4. The valuation of goodwill is subjective and not objective, because its valuation will differ
from estimator to estimator.

5. There is no relation between the value of goodwill and the amount spent to build the
same.
6. Goodwill of a business cannot be sold in a part or isolation. It is always sold with the
business except admission and retirement of a partner.

11.3.2 need for valuation of goodwill

Goodwill is valued when the business is disposed of, because no one would like to buy the
goodwill i.e., firm’s name and other advantages on the condition that the old business would
continue to run. This is generally so in the case of sole proprietorship business. But in the case of
partnership and company, valuation of goodwill may be required during the running business.
In case of a joint stock company: The valuation of goodwill may be required in the following
cases:
(a) When the business of a company is purchased by another company or when two companies
of the same nature amalgamate.

(b) When a company wants to acquire the controlling interest in another company.
(c) When government takes over the business of another company.
(d) When valuation of shares is done for taxation purposes – estate duty, gift tax etc., in case
stock exchange quotation is not available.
(e) When one class of shares is converted into another.
In case of partnership firm: Valuation of goodwill is required in the following cases:
(a) When the existing partners have agreed to change the profit-sharing ratio.

(b ) When a partner retires or expires.
(c) When the business is sold to a company.
(d) When firm is dissolved or amalgamated with another firm.
In case of sole proprietorship: Valuation of goodwill is required in the following cases:
(a) When business is sold.
(b) When estate duty is levied at the time of death of the proprietor.

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