“Goodwill is an intangible asset which shows the reputation of a firm in the market.”

Factors affecting valuation of goodwill :

(i) Nature of business : When a firm has more profit due to stable sales or it earns more profit due to some other reasons or a firm earns more profit than the expected profit or a firm earns profit due to high value added product we can say that there exists goodwill for that firm.

(ii) Location of business : If the business is centrally located or it is at a place having heavy customer traffic then more profit earning is possible in the business. For such kind of business, having prime location, may have high value of goodwill.

(iii) Period of business : Generally, older the firm higher the reputation in the market. Because majority of the customers are familiar and they have close and long term relations with business unit, value of goodwill of such business is bound to be high.

(iv) Market situation: The monopoly condition or limited competition enables the concerned firm earn to high profit. Therefore, the value of goodwill is high in such business.

(v) Efficiency of managers: The efficient management of a business increase the productivity and decrease the cost of a firm. Due to it, profit increases which ultimately increase the value of goodwill.

(vi) Other special benefits : When a firm/company acquire license, patent or trademark or has been earning more profit then the value of goodwill in that case is very high. Apart from the above given factors, services after sales, past achievements of a firm, good labour relations etc. also become the reasons to earn more profit. In this circumstances goodwill of the firm is again very high.