Investment Valuation in India

Valuation of Goodwill Goodwill has been valued by accountants since ages especially during mergers and acquisitions. Although practically speaking, Value of Goodwill is the difference between the Actual Price paid for the business less the book value of the business. However, there have been some defined approaches to valuation of business by accountants. Goodwill is defined as the super profit earning capacity of the business. A simplified approach to valuation of goodwill is as follows: Goodwill = Super Profit x Number of Years’ Purchase Super Profit = Future Maintainable Profit – Normal Profit Future Maintainable Profit: The buyer of business (or goodwill for that matter) is usually interested in what the business will be able to sustain as profits in future. Accordingly we adjust the historical profits to arrive at future maintainable profits. Take the historical profits for the last few years (e.g. 5 years). Identify if there is a clear trend in profits ...