PROJECT REPORT ON

GOODWILL

SUBMITTED TO :-

SUBMITTED BY:-

Ms.Menka Mehmi

Navdeep

Lect. Of Commerce

B.com 1ST year(2NDsem.)

(Deficient)
Roll No.10851395832

INDEX

INTRODUCTION OF GOODWILL

The name and fame of an organization can be termed as goodwill. Goodwill is the benefit
and merit of good name and reputation. Goodwill refers to a measure of the capacity of a
business to earn excess profit. Therefore, goodwill can be defined as an intangible asset of
the business. Thus, goodwill may also be defined as "value of the reputation of business". It
is a valuable asset if the concern is profitable. It is useless if the concern is a loosing concern.
Goodwill can be described as the extra sale able value attached to a prosperous business
beyond the intrinsic value of net assets. Thus the existence of goodwill can be felt through
extra earning power. Because of such a nature, it seems like a real assets. But since it is
invisible such as patents, trademark, copyrights etc. goodwill is termed as intangible assets.

Meaning of Goodwill:
Goodwill may be described as the aggregate of those intangible attributes of a business
which contributes to its superior earning capacity over a normal return on investment. It may
arise from such attributes as favourable locations, the ability and skill of its employees and
management, quality of its products and services, customer satisfaction etc.

Definition of Goodwill:
According to Lord Elden,
Goodwill is nothing more than the
profitability
that the old customer will resort to
the old place.

FEATURES OF GOODWILL

1. Intangible Asset:- . Goodwill is an intangible asset. It is non-visible but it is not a

fictitious asset.
2. Non separated:- It cannot be separated from the business and therefore cannot be
sold like other identifiable and separable assets, without disposing off the business as a
whole.
3. Value of Goodwill:- The value of goodwill has no relation to the amount invested
or cost incurred in order to build it.

4. Valuation of Goodwill:- Valuation of goodwill is subjective and is highly

dependent on the judgment of the valour.
5. Fluctuation of Goodwill:- Goodwill is subject to fluctuations. The value of
goodwill may fluctuate widely according to internal and external factors of business.
6. Nature of business:- A business having stable continuous demand for its products
such as consumer goods is able to earn more profits and hence has more goodwill. If
the business is risky, profits will be uncertain. The monopoly condition or limited
competition enables the enterprise to earn higher profits which leads to higher value of
goodwill.

7. Relationships:- It creates good relations with customers, suppliers, labour and

government.
8. Capital Required:- If two businesses have same rate of profit, the business which
requires lesser amount of capital tends to enjoy more goodwill.

FACTOR AFFACTING GOODWILL

1. Products and services:- It produces good quality and outstanding quality of

products and service.
2. Location factors:-If a business is located at a favourable place; it enhances the value
of goodwill.
3. Period :- The period for which the business has been in business.
4. Special advantages:-A company that enjoys special advantages such as favourable
contracts, assured supply of raw material at low rates, possession of trademarks, patents,
copyrights, technical knowhow and research and development, well known
collaborators etc. contribute to higher value of goodwill.
5. Nature of Business:-A business having stable continuous demand for its products
such as consumer goods is able to earn more profits and hence has more goodwill. If the
business is risky, profits will be uncertain. The monopoly condition or limited
competition enables the enterprise to earn higher profits which leads to higher value of
goodwill.
6. Efficiency of Management:-A firm having efficient management enjoys advantages
of high productivity and cost of efficiency. This leads to higher profits which in turn
increases the value of goodwill.
7. Capital Required:-If two businesses have same rate of profit, the business which
requires lesser amount of capital tends to enjoy more goodwill.

8. Relationships:- It creates good relations with customers, suppliers, labour and

government.

ACCOUNTING FOR GOODWILL

The various ways in which goodwill can be accounted for are as

follows:
(a) Carry it as an asset and write it off over a period of years through the profit and loss
account.
(b) Write it off against profits or accumulated reserves immediately.
(c) Retain it as an asset with no write-off unless a permanent diminution in value becomes
evident.
(d) Show it as a deduction from shareholders funds which may be authorized carried forward
indefinitely.
In this connection, it is important to state that goodwill should be recognized and recorded in
business only when some consideration in money or moneys worth has been paid for it.

NEEDS FOR ACCOUNTING:

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Valuation of goodwill may be made due to any one of the following

reasons:
(a) In case of a Sole-Proprietorship Firm:
(i) If the firm is sold to another person;
(ii) If it takes any person as a partner; and
(iii) If it is converted into a company.

(b) In the case of a Partnership Firm:

(i) If any new partner is taken;
(ii) If any old partner retires from the firm;
(iii) If there is any change in profit-sharing ratio among the partners;
(iv) If any partner dies;
(v) If different partnership firms are amalgamated;
(vi) If any firm is sold; and
(vii) If any firm is converted into a company.

(c) In the case of a Company:

(i) If the goodwill has already been written-off in the past but value of the same is to be
recorded further in the books of accounts;
(ii) If an existing company is being taken with or amalgamated with another existing
company;
(iii) If the Stock Exchange Quotation of the value of shares of the company is not available
in order to compute gift tax, wealth tax etc.; and

(iv) If the shares are valued on the basis of intrinsic values, market value or fair value.

IMPORTANCE OF GOODWILL

IM P O R T A N C E T O B U S IN E S S
IM P O R T A N C E T O C U S T O M E R S
A)
Goodwill is for Business what Reputation is for a
Person
You can say that goodwill is an emotion that exists within us and when you create an
emotional bond with the people, you deal with; you are rewarded with opportunity, business
networks, endorsements and trust. Here is a list of points to support the importance of
business goodwill.
Building goodwill with customers. Goodwill is important to increase your customer
base but also retain your old clients. This happens through word-of-mouth publicity
and recommendations. Many customers return to you if youve provided them good
customer service and have established a good relationship with them.
Investors are attracted to businesses that have goodwill. The goodwill of your firm is
equivalent to solid cash. It will help you obtain loans from banks with ease knowing
that you are a valued customer.
New avenues open up; opportunities are created through business networks if you
have longstanding business goodwill.

 When you want to sell your business at any point in time, your reputation and the
goodwill of your business will attract many potential buyers. You will be able to sell
your business for a good amount.

How to Build Business Goodwill

Goodwill is something that cannot be bought but has to be earned; there is no way to earn it
overnight. It will take considerable time and effort to develop goodwill in for a business. We
have listed some factors that aids in developing goodwill in business.
Maintain the quality of your products or services Remember that the first
impression is the best impression. If your business provides quality products/services
right from the beginning, you are taking the steps towards developing goodwill.

Rapport building and integrity People will find dealing with your
business easier when you take pleasure in servicing them and when
you provide business integrity.

Brand commitment -Your business should be one step ahead of your competitors.
A business under the limelight for the right reasons will attract goodwill for itself.

Service satisfaction A customer is likely to return to you and also recommend

your services/products if he is happy with his experience.
Community service not only helps in developing business good will but
also leads to small business longevity - As your business grows, you should
focus on investing in community goodwill. Some suggestions could be, making a
small donation to community functions or by giving a helping hand to those start-ups
of a different industry that are struggling. You can also promote amateur artisans and
musicians by holding exhibitions or concerts for them. Local residents would be
willing to buy tickets that are fairly priced. You should include other small businesses
to help with local events. It will pay-off with long-term sales growth and business
referrals.
Goodwill is all about the nature of the business and the integrity and
ethics with which you conduct your business. The understanding between
your customers and you, your employees and you also contribute to the
business goodwill. Consider goodwill as an honour that is impossible to
imitate.

B) The Importance of Creating Goodwill with Customers

Creating goodwill among people is important in almost every area of your life. Spreading
goodwill makes people feel good about you, and it encourages them to spread goodwill to
others. In business, creating goodwill can help you to build relationships that ensure the
long-term success of your business.
You can create goodwill in a number of ways, from creating customer appreciation programs
to going the extra mile when you are providing a service. In return, your business will reap a
number of benefits. Here are just a few ways that creating goodwill with customers can help
your business.

1. Encourages Brand Loyalty:- When you feel good about a company, you
want to do business with them again and again. Creating goodwill with
customers encourages brand loyalty by making them feel good about doing
business with you. Not only does it encourage customers to contact your
company the next time they need a product or service that you offer, but it also
encourages them to recommend your company to their family and friends,
helping you to expand your customer base.

2. Encourages Forgiveness:- Think about how you feel when your neighbour
brings you a big tin of cookies at Christmas time. You are probably less likely to
be upset when that same neighbour parks in front of your yard or doesnt bring
in their newspaper, letting a pile form in the driveway. The same concept applies
to your business. When you create goodwill with your customers by going the
extra mile, by exceeding their expectations, or by showing them personal
attention they are more likely to overlook your mistakes when you make them.

3. Sets You Apart from the Competition:- When customers are having a
hard time choosing between companies who have similar products and price
points, the goodwill you create can help set you apart from your competition and
push them in your favour. Maybe you went the extra mile by tracking down
obscure information to answer a question.

4. Improves the Value of Your Business:- Investors understand the

importance of goodwill and what it builds with customers. If your company has
a positive reputation as a result of the goodwill it has built, it will increase its
value. This will help you to attract more investors or secure credit more easily if
you are looking to expand your operations, and it will help you to command
more in a sale if you choose to sell your business. Building goodwill builds
value.

ADJUSTMENT FOR GOODWILL

The concept of goodwill can be understood on the basis of its operational significance.
Goodwill is what goodwill does. It brings in more customers to a firm, without much
persuasion.

Goodwill arises mainly on account of:

(1) Good reputation of the owners,
(2) Established popularity of products,
(3) Effectiveness of Advertising,
(4) Favourable Locality,
(5) Monopoly and
(6) Non-availability of similar products etc.
In case a firm is not going and is not successful, there will be no value attached to goodwill;
if any value appears, then it will be not only intangible but also fictitious. Goodwill arises
only if a firm earns extra profits, which is called super profits.

There are two points:

(1) When one buys a business, he will be able to get profits in future only and is not
concerned with the past profits at all.
(2) Goodwill is paid for the ability to earn super profits and not for ordinary profits.
Goodwill is the value of reputation of a firm in respect of profits expected in future over and
above the normal profits.

Indications for the Existence of Goodwill:

There are a number of contributing factors responsible for the existence of goodwill.

The following are some of the deciding factors in favour of the existence of
goodwill:
1. In a manufacturing firm, the quality, standardisation, and price of a product etc. are
important factors.
2. In a distribution firm, the terms and conditions of the credit facility etc. are important.
3. In bank services, the safety of money deposited, liberal policy of lending, prompt services
etc. are indicators of goodwill.
4. In hotels, the taste and quality of the food, cleanliness and courteous service etc. are
indicators of goodwill.
5. In a firm of Doctors, the diagnostic ability, surgical dexterity is evidence for goodwill.
6. In a firm of Chartered Accountants, the sharp insight is an indication of goodwill.
7. In a provision store, the courtesy shown to the customers, supply of good quality items at
reasonable price etc. are the proof of existence of goodwill.
Because of all these special attractions, a firm may attract many customers, in turn more
sales, in turn more profits; in turn establish the existence of goodwill. The goodwill is a silent
super-salesman and an attractive force by which customers become invitees without
persuasion.

ACCOUNTING TREATMENT OF
GOODWILL
In case of admission of a new partner.
In case of a death or retirement of a partner.
In case of Reconstitution of Partnership.

(A).IN CASE OF ADMISSION OF A NEW PARTNER

When a new partner enters in partnership firm, the old partner sacrifices his share for him ,
so it is the duty of new partner to give goodwill in cash or in any other way to old partner .
There are following method with this new partner give his share of goodwill to old partners .

1st method
Private distribution of goodwill
Under this method , new partner gives his share of goodwill to old partners personally .So
there is no need to record it to the books of firm . No journal entry will pass .

2nd method
Goodwill is given in cash form by new partner
Under this method , old partner bring his share of goodwill in cash form in the firm and it is
taken by old partner in their sacrifice ratio . For this following journal entry pass in the books
of firm
(1) Cash / Bank Account (Dr) ................xxxx
To Goodwill / Premium Account .............xxxx

(2) Goodwill account (Dr.).................. xxxx ( share of new partners goodwill )

To old partners capital account ..............xxxx ( divide in sacrifice ratio )

3rd method
when new partner bring goodwill in cash in business and taken by old partner and then
withdraw by old partner
Above two entries will pass as same as in second method but third new entry will pass
Old partners capital account (Dr.)................ xxxx
To cash / bank account ...........................xxxx

4th method
When new partner do not bring goodwill in cash form
If new partner do not bring goodwill in cash in firm , then following entry will pass for the
adjustment of goodwill .
New partners capital account (Dr.).......... xxxx (share of goodwill )
To old partners capital account .......xxxx (division in sacrifice ratio)

5th method
If partial in cash form of goodwill
Part of cash goodwill
(1) Cash account(Dr.).............. xxxxxx
To goodwill / premium account .............xxxx

(2) Goodwill account (cash goodwill)(Dr.).......... xxxx

New partner account ( not in cash goodwill)(Dr.)......... xxxx
To old partner capital account in sacrifice ratio ........xxxxxxx

6th method
If goodwill already exits in balance sheet of old partner , then it must be transfer to old
partners capital account in old ratio .
Other method is same above from 1 to 5 method .
Entry passed for transferring of old goodwill
Old partners capital account (Dr.) ..............xxxxxxx
To goodwill ...................xxxxxxx

7th method
If new partner brings other asset as goodwill of his share of goodwill .
Then following entry will pass

(1) Asset account (Dr) ....................................xxxxxx

To goodwill account.............................. xxxxxxxx
(2) Goodwill account (Dr.)............................... xxxxxxxxx
To old partners capital account in sacrifice ratio ........xxxxxxxxxx

(B).IN CASE OF DEATH OR RETIREMENT OF A PARTNER

The valuation of goodwill has been discussed in admission of a partner. The same process
should be followed here too. But during the time of retirement, the retiring partner has the
right to get his share of goodwill of the firm. Therefore, to give effect to the same, the
following adjustment must be carried out.

A. Goodwill already appears in the books

i. If old value of goodwill is equal to new valuation of goodwill:
- Adjustment entry is not needed
ii. If the existing value of goodwill is less than the new valuation:
Goodwill A/C.........Dr.(excess value)
To all partners' capital A/C
Note: The excess amount of goodwill is transferred to remaining and outgoing partners
according to old profit sharing ratio.
iii. If the existing value of goodwill is greater than new valuation:
All partners' capital A/C..........Dr.(less value)
To Goodwill A/C

B. Goodwill not already appeared in the book

i. Goodwill raised at its full value:
Goodwill A/C.............Dr.
To All partners' capital A/C
ii. Goodwill raised at its full value and written off immediately:
Goodwill A/C ...........Dr.
To all partners' capital A/C (old profit sharing ratio)
iii. Goodwill raised at only retired partner's capital account and immediately written
off:
Goodwill A/C............Dr.
To retired partner's capital A\C

(C).IN CASE OF RECONSITITUION OF PARTNERSHIP

1. Accounting Treatments required at the time when Existing Profit

Sharing Ratios changes.

Following Accounting Treatments are required at the time of changing in
Existing Profit Sharing Ratios :
(i) Accounting Treatment for Goodwill (In Sacrificing and Gaining Ratio).
(ii) Accounting Treatment for Revaluation of Assets and Liabilities ( In Old
Profit Sharing

Ratio)

(iii) Accounting Treatment for Distribution of Undistributed Profits-Losses and

Reserves
(In Old Profit Sharing Ratio)
(iv) Accounting Treatment for Adjustment of Capital ( If Capital is changed)

2.

Accounting Treatments are required at the time of Admission of a

New Partner
Following Accounting Treatments are required at the time of Admission of a
New Partner/Partners :
(i)

Accounting Treatment for Goodwill (In Sacrificing Ratio).

(ii) Accounting Treatment for Revaluation of Assets and Liabilities ( In Old

Profit Sharing Ratio)
(iii) Accounting Treatment for Distribution of Undistributed Profits-Losses and
Reserves
(In Old Profit Sharing Ratio)
(iv) Accounting Treatment for Adjustment of Capital ( If Capital is changed)

3.Accounting Treatments are required at the time of Retirement/Death of a

Partner
Following Accounting Treatments are required at the time of Retirement/Death

of a

Partner :
(A) Calculation of Amount Due :
First of all Amount Due will be calculated with the help of the following points to be paid to
the Retiring partner or the legal heir/heirs of the deceased partner.
(i)

Accounting Treatment for Goodwill (In Sacrificing Ratio and Gaining Ratio).

(ii) Accounting Treatment for Revaluation of Assets and Liabilities ( In Old Profit Sharing
Ratio)
(iii) Accounting Treatment for Distribution of Undistributed Profits-Losses and Reserves
(In Old Profit Sharing Ratio)
(iv) Accounting Treatment for Life Insurance Policies (If taken)
(v)

Other Accounting Treatments :

a)

Interest on Capital

b)

Interest on Drawings

c)

Share in Profits (for the current accounting period, if retirement/death happens in

mid term)
d) Any Remuneration or Commission Amount
(B)

Payment of Amount Due :

After calculation of Amount Due, next step will be "the payment of the Amount Due".
Payment can be made by any of the following three methods :
(i)

Lump-Sum Payment

(ii)

In Instalments

(iii)

By giving Annuity

So we are to take care of the above mentioned Accounting Treatments in the various cases of
Reconstitution of Partnership Firm.

TYPES OF GOODWILL
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() Purchased Goodwill:Purchased goodwill arises when a business concern is purchased and the purchase
consideration paid exceeds the fair value of the separable net assets acquired. The purchased
goodwill is shown on the assets side of the Balance sheet. Para 36 of AS-10 Accounting for
fixed assets states that only purchased goodwill should be recognized in the books of
accounts.

(b) Non-Purchased Goodwill/Inherent Goodwill:Inherent goodwill is the value of business in excess of the fair value of its separable net
assets. It is referred to as internally generated goodwill and it arises over a period of time due
to good reputation of a business. The value of goodwill may be positive or negative. Positive
goodwill arises when the value of business as a whole is more than the fair value of its net
assets. It is negative when the value of the business is less than the value of its net assets.

METHODS OF GOODWILL

MGO oe ot hd ow d i ls l
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These methods have been explained as follows:1. Arbitrary Valuation:- value of goodwill, in this case is fixed by mutual
agreement between the parties. In some cases, the value may be fixed by an
independent person known as Arbitrator. This method can be used only where
earning capacity of the firm is exactly known.
2. Average Profits :- Under this method goodwill is calculated on the basis of
the average of some agreed number of past years. The average is then multiplied
by the agreed number of years. This is the simplest and the most commonly
used method of the valuation of goodwill.
Goodwill = Average Profits X Number of years of Purchase

Before calculating the average profits the following adjustments should be made
in the profits of the firm:
a. Any abnormal profits should be deducted from the net profits of that year.
b. Any abnormal loss should be added back to the net profits of that year.
c. Non operating incomes e.g. income from investments etc should be deducted from
the net profits of that year

3. Super profits method:Super Profits are the profits earned above the normal profits. Under this method
Goodwill is calculated on the basis of Super Profits i.e. the excess of actual profits over the
average profits.
For example if the normal rate of return in a particular type of business is 20% and your
investment in the business is $1,000,000 then your normal profits should be $ 200,000. But if
you earned a net profit of $ 230,000 then this excess of profits earned over the normal profits
i.e. $ 230,000 $ 200,000= Rs.30,000 are your super profits. For calculating Goodwill,
Super Profits are multiplied by the agreed number of years of purchase.
Steps for calculating Goodwill under this method are given below:
i) Normal Profits = Capital Invested X Normal rate of return/100
ii) Super Profits = Actual Profits Normal Profits
iii) Goodwill = Super Profits x No. of years purchased

4.Capitalisation Method:
There are two ways of calculating Goodwill under this method:
(i) Capitalisation of Average Profits Method

(ii) Capitalisation of Super Profits Method

(i) Capitalisation of Average Profits Method:

Under this method we calculate the average profits and then assess the capital needed for
earning such average profits on the basis of normal rate of return. Such capital is called
capitalised value of average profits. The formula is:Capitalised Value of Average Profits = Average Profits X (100 / Normal Rate of Return)
Capital Employed = Assets Liabilities
Goodwill = Capitalised Value of Average Profits Capital Employed

(ii)Capitalisation of Super Profits:

Under this method first of all we calculate the Super Profits and then calculate the capital
needed for earning such super profits on the basis of normal rate of return. This Capital is the
value of our Goodwill .
The formula is:Goodwill = Super Profits X (100/ Normal Rate of Return)

5. Annuity Method:- Under this method, goodwill is calculated by finding the

present worth of annual super profits to be earned over an estimated period by
discounting at a given rate of interest. The present value factor of annuity for the
given number of years and interest rate can be obtained by making a reference to
annuity table. Under this method, value of goodwill is calculated by using the
following formula:
Goodwill =super profits x Annuity factor

6. Hidden Goodwill:- When the value of goodwill is not given in the question,
it has to be calculated on the basis of total capital/net worth of the firm and profit
sharing ratio. Illustration 8. X and Y are partners with capitals of 10,000 each.
They admit Z as a partner for 1/4th share in the profits of the firm.

GOODWILL VALUATION APPROACHS

There are several generally accepted methods applicable to the goodwill valuation. After
considering the similarities and differences, each method may be categorized into one of the
three intangible asset valuation approaches. As stated above, cost approach and market
approach valuation methods are less commonly used, and income approach valuation
methods are more commonly used in the goodwill analysis. The following discussion
summarizes these valuation methods.

Income Approach:- The Income Approach With regard to goodwill,

the income approach methods include the residual from business value
method, the capitalized excess earnings method, and the present value of
future income method. Each of these valuation methods is based on the
concept of goodwill as the present value of future income not associated
with the entitys tangible assets or identifiable intangible assets.

Cost Approach :- The financial adviser estimates the amount of

current cost required to recreate the goodwill component elements. The
cost approach typically involves a component restoration method. The
first procedure in the component restoration method is to list all of the
individual components of the entitys goodwill. The second procedure is
to estimate the amount of current cost required to replace each goodwill
component. This procedure is based on the concept of goodwill as
represented by the intangible value of all entity assets in place and ready
to use. One procedure in the restoration method is the analysis of forgone
income (considered an opportunity cost in the cost approach) during the
time period required to assemble all of the entitys tangible assets and
identifiable intangible assets.

Market approach:- There are two common market approach methods

related to goodwill. The first method estimates the value of goodwill as
the residual from an actual business acquisition price. This method is

called the residual from purchase price method. The second method
estimates the value of goodwill based on an analysis of guideline sale
transactions. This method is called the sales comparison method.
Goodwill is rarely sold separately from any other assets (either tangible
assets or intangible assets) of a going-concern business

COMPONENTS OF GOODWILL
1. Excess of the fair values over the book values of the acquirers recognized
assets. In a business acquisition, as assets acquired are measured at fair value, these
excesses should not exist. Subsequent to the acquisition, the acquirers goodwill could
include such excesses where assets are measured at cost.

2. Fair values of other net assets not recognized by the acquire. The assets of
concern here are those tangible assets which are incapable of reliable measurement by the
acquire, and nonphysical assets that do not meet the identifiability criteria for intangible
assets.

3. Fair value of the going concern element of the acquirers existing

business. This represents the ability of the acquire to earn a higher return on an assembled
collection of net assets than would be expected from those net assets operating separately.
This reflects synergies of the assets, as well as factors relating to market imperfections such
as an entitys ability to earn a monopoly profit, or where there are barriers to competitors
entering a particular market.
4. Fair value from combining the acquirers and acquirers businesses and

net assets. This stems from the synergies that result from the combination, the value of
which is unique to each combination.
5. Overvaluation of the consideration paid by the acquirer. This relates to errors
in valuing the consideration paid by the acquirer, and may arise particularly where shares are
issued as consideration with differences in prices for small parcels of shares as opposed to
controlling parcels of shares. There could also be overvaluation of the fair values of the
assets acquired. This component could then relate to all errors in measuring the fair values in
the business combination.
6. Overpayment or underpayment by the acquirer. This may occur if the price is
driven up in the course of bidding; conversely, goodwill could be understated if the
acquirers net assets were obtained through a distress or fire sale.

GOODWILL DATA SOURCE

Goodwill data sources can be either internal or external to the entity. Internal data sources
typically relate to documentation regarding the entitys historical or prospective results of
operations. External data sources typically relate to empirical pricing data with regard to the
goodwill of guideline business or professional practice sale transactions

Internal Data Sources :1. The existence of identified tangible assets and intangible assets, including a detailed
listing of working capital accounts, real estate, tangible personal property, and identifiable
intangible assets (including intellectual property)
2. The valuation of tangible assets and identifiable intangible assets, including recent
appraisals of any asset category
3. The historical results of business operations, including historical income statement extern
balance sheets, cash flow statements, and capital statements
4. The prospective results of business operations, including current budgets, plans, forecasts,
and projections prepared for any purpose Information from these internal data sources can be
used in the goodwill valuation.

External Data Source :For certain industries (principally professional practices), there are publications, periodicals,
and online data sources that report on the goodwill components of actual business sale
transactions. Some of these data sources are listed in the next section
3. Bank M&A Weekly (Charlottesville, VA: SNL Financial, weekly). Bank M&A
Weekly is the only source dedicated to comprehensive coverage of bank and
thrift industry consolidation, including branch deals and other asset transactions.
Delivered via e-mail every week, each issue includes key deal ratios, buyer and
target financials, industry trends, and feature stories
4. The Lawyers Competitive Edge: The Journal of Law Office Economics and
Management (Eagan, MN: West, monthly). Practical management information
to minimize falling profits, client loss, and employee dissatisfaction.

5. Merger & Acquisition Survey of Architecture, Engineering, Planning &

Environmental Consulting Firms (Natick, MA: Zweig White & Associates,
annual).

REASONS TO VALUE GOODWILL

1. Economic damage analyses. When a business has suffered a breach of
contract or a tort (such as an infringement, breach of a fiduciary duty, or
interference with business opportunity), one measure of the damages suffered is
the reduction in the value of the entitys goodwill due to the wrongful action.
2. Business or professional practice merger. When two businesses merge,
the equity of the merged entity typically is to be allocated to the merger
partners. One common way to allocate equity in the merged entity is in
proportion to the relative value of the assets contributed, including the
contributed goodwill
.
3. Business or professional practice separation . When a business
separates, the assets of the consolidated business typically have to be allocated
to the individual business owners. One common way to allocate the assets to the
separating business partners is in proportion to the relative value of the assets
controlled by or developed by each partner, including the goodwill of each
business partner.
4. Solvency test. The solvency of a business entity is an issue with regard to
lenders fraudulent conveyance concerns during a financing transaction or a
financial restructuring. One of the individual tests to determine if a business
entity is solvent is: Does the fair value of the entitys assets exceed the value of
the entitys liabilities (after consideration of the financing transaction).
5. Insolvency test. The degree of insolvency of a business entity may have
federal income tax consequences if debt is forgiven (in whole or in part) during
a refinancing transaction or financial restructuring. One of the specific tests to
determine if a business entity is insolvent for federal income tax purposes is: Is

the fair market value of the entitys assets less than the value of the entitys
liabilities.

6. Business enterprise valuation. The identification and quantification of

goodwill is one procedure of the asset-based approach to business valuation. An
asset-based approach is often used in the valuation of an industrial or
commercial company or professional service business.
7. Deprivation analysis. The goodwill valuation may be one component in the
damages analysis associated with a business that is subject to a condemnation,
expropriation, or eminent domain action. Financial advisers sometimes only
consider the value of the entitys real estate and tangible personal property
subject to the condemnation or other taking.
8. Intercompany transfer price. When intangible assets are transferred
between related entities (for example, between a parent corporation and a less
than wholly owned subsidiary), an arms-length price should be estimated for
the intercompany transfer of the assets.
9. Ownership allocation litigation. Several forms of litigation involve the
allocation of direct or indirect ownership interests in a business entity.
10. Intercompany transfer price. When intangible assets are transferred
between related entities (for example, between a parent corporation and a less
than wholly owned subsidiary), an arms-length price should be estimated for
the intercompany transfer of the assets. Such an intercompany transfer may
affect the profitability and return on investment of, say, two subsidiariesone
that is wholly owned and one that has a 10 percent minority interest owner.