Goodwill Valuation

Goodwill Valuation can be based on the average annual net profit x (multiply) an agreed figure.

Here is an example of a goodwill valuation: The profits for an agreed number of years preceding the valuation are averaged to arrive at an average annual profit earned and then goodwill is estimated to be worth so many years purchase of such average profit.

Say Limited Liability Partnership registered the following annual profits: Year 1 : Profits $100,000 Year 2: Profits $200,000 Year 3: Profits $150,000.  If goodwill is agreed to be valued as a two years’ purchase of average profit for the last three years. The Goodwill computation for average profit is $100,000 + $200,000 + $150,000 / 3 = $150,000. Goodwill will be calculated as $150,000 x 2 agreed years = $300,000.

Updated On: 09.10.04