In this article we will discuss about the internal and external factors affecting the valuation of goodwill of a business.
Internal Factors Affecting Valuation of Goodwill :
(1) If risk is less in a business, then the amount of goodwill will be more than those businesses in which risks are more.
(2) If quality of goods manufactured is better, there will be more goodwill.
(3) If more profits are made in a business, no doubt, goodwill increases.
(4) If more profits can be derived by investing comparatively less capital, then value of goodwill increases.
(5) The better the relations between employer and employees more will be goodwill.
(6) The profits of the past years play an important role in determination of goodwill.
(7) If a firm has established reputations for a patent or trade-mark, it will have goodwill due to it.
(8) If the increasing trend of profits can be maintained in future, without risk, the amount of goodwill will be more.
(9) Some places are famous for certain products. If a business is carried on at these place, goodwill is created.
(10) If management expenses are less, comparing with the profits, goodwill increases.
External Factors Affecting Valuation of Goodwill :
(1) If customers’ point of view is good about the business, goodwill will be more and vice versa.
(2) The position of the business in relation to its competitors is an important factor.
(3) Popularity of products in terms of quality and effective after-sales-services.
(4) Availability of raw materials is also one of the factors influencing the value of goodwill.
(5) If a business is enjoying political protection or it is expected to enjoy political protection, the value of goodwill will be more.
(6) Effective advertising to establish brand popularity.
(7) Good industrial relations with other industries.
(8) Research and Development efforts.
(9) Technical collaborations with established companies.
(10) Customers’ favourable attitude and customer satisfaction.