Methods of Valuation of Goodwill

1. Average Profit Method

1.1. Simple Average Profit Method

1.1.1. Goodwill = Average Profit × Number of Years’ Purchase

1.1.1.1. Average Profit = Total Normal Profit / Number of Years

1.2. Weighted Average Profit Method

1.2.1. Goodwill = Weighted Average Profit × Number of Years’ Purchase

1.2.1.1. Weighted Average Profit = Total of Weighted Profit / Total of Weight

2. Super Profit Method

2.1. Goodwill = Super Profit × Number of Years’ Purchase

2.1.1. Super Profit, = Average Profit – Normal Profit.

2.1.1.1. Average Profit = Total Normal Profit / Number of Years

2.1.1.2. Normal Profit = Average Capital Employed × Normal Rate of Return /100

2.1.1.2.1. Average Capital Employed = Opening Capital Employed + Closing Capital Employed /2

3. Capitalisation Method

3.1. Capitalisation of Average Profit

3.1.1. Goodwill = Capitalised Value of the Business – Net Assets

3.1.1.1. Capitalised Value of the Business

3.1.1.1.1. Capitalised Value of the Business = Average Profit × 100 / Normal Rate of Return (Profit)

3.1.1.2. Net Assets

3.1.1.2.1. Net Assets = All Assets (other than goodwill, non-trade investments and fictitious assets) at their current values minus outside liabilities

3.2. Capitalisation of Super Profit

3.2.1. Goodwill = Super Profit × 100 / Normal Rate of Return .

3.2.1.1. Super Profit