Goodwill consists of the advantages a business- has in connection with its customers, employees and outside parties with whom it has to contact. That is why it was defined as the probability that the old customers will resort to the old place. Goodwill has been said lo be attractive force which brings in customers. Thus, to determine the nature of goodwill in a particular case, it is necessary to consider the type of business and the type of customers which such a business is inherently likely to attract as well as surrounding circumstances of each case.
Goodwill of a business is a composite thing referable in part to its locality, in pan lo the way in which it is conducted and the personality of those who conduct and in part to the likelihood of competition. According to Braden and Allyn, “‘Goodwill is an intangible asset compounded from a variety of successful business ingredients — competent and energetic management, customer acceptance, a favorable location, a quality and profitable product, efficient production methods, an outstanding reputation, plus the expectation that these ingredients, will continue to produce an above-normal rate of return for an indefinite period of time.”
Goodwill is sometimes described as a ‘momentum or a push’ that keeps the business going without further effort like the momentum of a body that continues its motion against a retarding force till it comes to rest gradually.
When a man pays for goodwill, he pays for something which places him in the position of being able lo earn more than he would be able lo do by his own unaided efforts. Goodwill is thus present value of a firm’s anticipated excess earnings. It is the extra saleable value attaching to a prosperous business beyond the intrinsic value of net assets.
Features of Goodwill :
The following are the special features of goodwill ;
(i) Goodwill can be sold only with the entire business or it cannot be sold in part or in isolation except on admission or retirement of a partner when new partner .compensate the old partners or the retiring partner gives up his rights in favour of remaining partners.
(ii) Goodwill is valuable only if it is capable of being transferred from one person to another. If it cannot be transferred then there will be no value of goodwill.
(iii) Goodwill represents a non-physical value over and above the physical assets.
(iv) Goodwill cannot have an exact cost as its value fluctuates from time to time due to internal or external factors which ultimately affect the fortune of the Company.
(v) The value of goodwill is based on subjective judgement of the valuer.
Types of Goodwill :
The goodwill is generally of two types i.e., purchased goodwill or non-purchased (raised) goodwill. Purchased goodwill arises only when a business enterprise is acquired by another business enterprise and the price paid is more than the net assets acquired. Such goodwill is recognized by the accounting profession and is also shown in the Balance Sheet. The main features of such goodwill are — (i) It arises only on purchase of business (ii) It is reflected by a purchase transaction (iii) Us cost could, depend upon the future maintainable profits (iv) It can be shown in the Balance Sheet.
Non purchased (or raised) goodwill arises only when a business generates its own goodwill over a period of lime due to various factors such as location, good management, good quality products etc. The main features of such goodwill are : (i) It is internally generated, (ii) No cost can be placed on it, (iii) Value of goodwill is based on the subjective judgement of the valuer, (iv) It is not reflected by a purchase consideration, and (v) It is not shown in the Balance Sheet.
Classes of Goodwill:
According to Rowland, ‘There are four principal classes of goodwill, viz.,
(1) Local, arising from the situation of the trader’s premises, e.g., a retail shopkeeper in a busy market centre ;
(2) The Personal Reputation of the individual, arising through his skill, influence and personality, as in the case of a professional man, e.g., an accountant or a doctor ;
(3) The Reputation of the Goods Sold, arising from the high standard of quality of the goods sold themselves, e.g., a well-advertised brand of proprietary goods ;
(4) The Absence of Competition, or the existence of an absolute Or partial monopoly.