Goodwill is an intangible asset that arises when a buyer acquires an existing business. It is the established reputation of a business regarded as a quantifiable asset and calculated as part of its value when it is sold.
Factors that Affecting Goodwill –
- Quality of Product:
A firm producing qualitative products can easily have name and fame in the market. Better quality of product will increase sales and profits which will increase the value of goodwill. This leads to an increase in the value of goodwill.
The efficiency of Management:
A well-handled interest normally enjoys the merit of more cost efficiency and productivity, which will increase the value of goodwill. It may also help to increase the value of goodwill by increasing profits through properly planned production, distribution, and services. An increase in the value of goodwill is the result of efficient management.
If the firm is centrally located or located in a very prominent place, it can attract, more customers resulting in an increase in turnover. The better location will attract more customers resulting in an increase in sales and profits which in turn, will result in an increase in the value of goodwill.
- Nature of Business:
The nature of business is another factor that affects the value of goodwill. When the firm enjoys favorable situations, along with a secured monopoly which brings more earnings which are assured, the value of goodwill increases. A firm with constant sales has more chances of earning profit and naturally goodwill too.
- Market Condition:
The monopoly situation or limited competition facilitates the concern to earn more gains which leads to the more value of goodwill. The organization has a monopoly right or condition in the market or having limited competition, enables it to earn high profits which in turn leads to a higher value of goodwill.
- Access to Supplies (Raw Material Etc.):
If a firm has better access to supplies or assured supply of inputs then it enjoys a better reputation than others and higher goodwill. In the case where the supplies of raw materials are difficult to secure, there will be higher goodwill of the firm which has easy access to raw material.
- Special Advantages:
If a firm enjoys special advantages like patents, trademarks, brand image, or any other exclusive benefit, then the firm enjoys a higher value of goodwill.
- Capital Required:
The more, the capital of business, the more chance of goodwill. More buyers may be interested to purchase a business that requires a comparatively small amount of capital but the rate of earning profit is high and, consequently, raise the value of goodwill.
- External resources:
After-sales service, Research & Development, Effectiveness of Advertisement, the supply of electricity, import licenses, well-known collaborators, long-term contracts for the supply of materials, trademarks, patents, etc.certainly enjoy more value of goodwill.