What are the methods of valuation of Goodwill ?

By Sandeep Kumar

 There are several methods for valuing goodwill, including the following:


1. **Average Profits Method:** This involves taking the average profits of the business over a certain period and applying a suitable number of years as a multiplier.


2. **Super Profits Method:** This method calculates the goodwill by deducting normal profits from the actual profits, and then applying a suitable multiplier.


3. **Capitalization Method:** Goodwill is valued by capitalizing the average annual profits at a certain rate. The formula is Goodwill = Average Annual Profit × Capitalization Rate.


4. **Annuity Method:** This method calculates the present value of future expected super profits, considering them as an annuity.


5. **Market Capitalization Method:** Goodwill is calculated by subtracting the net assets from the market capitalization of the company.


6. **Excess Earnings Method:** This method determines the value of goodwill by identifying and quantifying the excess earnings generated by the business.


Each method has its strengths and limitations, and the choice of method depends on the nature of the business and available information.

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