India is a growing economic country, where different types of businesses are operated including the MNCs, SMEs, Publicly Traded Companies, Private Companies, Joint Ventures, Government Owned Organizations, Small Scale Organisations and various others. A Business is an organized effort or enterprise that is involved in commercial, industrial and professional activities with the prime goal of making profit. There are some intangible qualities that a business holds which involves brand recognition, its recall value, and brand loyalty which results in the Goodwill of the business. The stronger the reputation of the business the stronger will be their brand recognition. It's very necessary for a business to determine its Valuation of Goodwill, which represents their relationship with everyone involved in their business directly or indirectly. Businesses can vary widely in terms of their size, structure, industry and objectives, but they still share some common elements including Goods and Services, Profit Motives, Customers or Clients, Organization and Structure and Value Creation.
Indian Businesses are regarded as the main source of the country's economic growth, employment generation, and the overall development of the country. There are various factors that highlights the importance of Businesses in India including -
- Economic Growth
Various business activities including Manufacturing, services and trade contributes significantly to the country’s GDP. which helps in the overall economic development of the country.
- Generating employment -
India has a large labor force and the Indian Businesses plays a pivotal role in generating employment and improving the standard of living by decreasing the rate of unemployment.
- Innovation and Technology -
Businesses invest in research and development and bring various advancements into the country. They drive innovations and technology adoptions very well and easily.
- Government Revenue -
Businesses pay the taxes and duties that contribute to the government revenue. This revenue is essential to funding the social welfare programs, public infrastructure and other government initiatives.
- Developing Skills -
Businesses in India conduct skill development workshops and training programs for their employees, that leads to the overall skill development country’s workforce.
In this blog we come up with another interesting topic of Valuation of Goodwill, the necessary requirement of every business. We hope by reading the first segment of the blog you understand about the business, its importance and its classification. In the second segment of this blog we tried to talk about the Valuation of Goodwill and some other related basic topics.
Before understanding the concept of Valuation of Goodwill, we will first understand what is Valuation and what is Goodwill.
Valuation
Valuation is the process of calculating the current worth or financial value of an asset, investment or business. In businesses valuation includes assessing the overall economic value of a company. It includes various Tangibles (like buildings, machinery,etc) and Intangible assets (like Brand Value, Goodwill, Brand Loyalty). It is done for various purposes such as buying and selling assets, financial reporting, taxation, investment analysis, mergers and acquisitions.
Valuation methods depend on the nature of the asset and the business being valued, there are some common methods used for valuation.
- Market Valuation
Calculating the value based on comparable market prices of some similar asset or businesses.
- Income Valuation
Determining the value based on the income generated by the asset or business.
- Asset Based Valuation
Assessing the value based on the net value of the company’s asset, considering both tangible and intangible assets.
- Cost Approach
Estimating the cost to replace and reproduce the asset.
Goodwill
Goodwill is the intangible value that a business possesses beyond its tangible assets, we can say Goodwill is the value of the business’s good name/ loyalty. Goodwill includes the customer loyalty, brand reputation, brand recognition and the overall good standing in the marketplace that a company has built over a particular period of time.
When a business has a strong and positive reputation, it attracts more customers and audience and they command higher prices for its products and services, and generally enjoy a competitive advantage. Goodwill is considered an intangible asset on a company's balance sheet and its value is subjective.
Valuation of Goodwill
Let's start talking about Valuation of Goodwill, so it's an intangible asset that represents the reputation, brand and customer relationships of a business.
It can be easily calculated by subtracting the actual capital employed in a business from the capitalized value of average profits.
There are various methods that can be used to determine the Valuation of Goodwill, including the Excess Earning Method, and Market Capitalization Method.
In the Excess Earning Method, the goodwill value can be determined by calculating the net tangible assets and then adding the present value of the expected future excess earning. Whereas in the Market Capitalization Method, the value of a business is evaluated based on the difference between the market capitalization of the business and the book value of its net assets.
The valuation of goodwill depends on numerous factors including the Industry market conditions, and the circumstances of the business.
Need for valuation of goodwill arises in various circumstances, that can include
- In the case of partnership, where there is an admission, retirement or death of a partner, amalgamation, conversion into a company, and change in profit sharing ratio.
- For the taxation purposes, involving the wealth tax.
- In case of sole trading concern, goodwill is valued at the time of selling of a business to take any person as a partner, to convert the sole trading concern into the company.
Hoping this blog suits you well, and helps you to understand the details precisely.
