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Goodwill Calculation Methods

AVERAGE PROFITS METHOD

Under this method, the value of goodwill is equal to the average profits for a set time period. It’s calculated by multiplying the average profits by a certain number of years’ purchase.

Goodwill = Future Maintainable Profit After Tax x Number of Years’ Purchase

SUPER PROFIT METHOD

Super profit is the excess of estimated future profits over average profits. To use this method, you’ll need to calculate the average profits from the previous years.

Super Profit = Average maintainable profits – Normal Profits

Goodwill = Super Profit x Number of Years’ Purchase

CAPITALIZATION OF PROFITS

The capitalization method defines how much capital is needed to produce average or super profits, assuming the business earns a normal rate of return for the particular industry.

This amount of capital is known as the capitalized value of profits. The excess of the amount of capital over the total capital employed by the business can be considered goodwill.

Capitalized Value of Average/Super Profits = Average/Super Profits X (100 / Normal Rate of Return)

Goodwill = Capitalized Value of Average/Super Profits – Capital Employed

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