10 Important Factors Affecting Goodwill | Business

The main factors affecting the goodwill are as follows:-  1. Suitable Location of the Business 2. Managerial Skill 3. Nature of Business 4. Risk in Business 5. Favourable Contracts 6. Trend in the Profit 7. Possession of Patent and Trade Marks 8. Capital 9. Government Patronage 10. Other Factors.

Factor # 1. Suitable Location of the Business:

The place or locality where the business is situated determines the goodwill. A favourable location surrounding the company where many customers come, enhances the value of goodwill.

Factor # 2. Managerial Skill:

Special ability and skill of the persons engaged in the management adds to the value of goodwill. When the management is able, efficient and competent in the business, in turn, profit increases, which is a symptom of creating goodwill. Goodwill is the money value of a continuation of the various benefits which are being received by the business because of the efficient management of the business.

Factor # 3. Nature of Business:

By nature of business, we mean, the type of products, demand for them, competition prevailing, Government regulations affecting the business etc. that are worthy to be looked upon. When the firm enjoys favourable situations, along with secured monopoly which brings more earnings which are assured, value of goodwill increases.

Factor # 4. Risk in Business:

When the risk is less in the business, it creates more goodwill but if the risk is more, it will create less goodwill.

Factor # 5. Favourable Contracts:

Possession of large number of profitable contracts for supply of goods or services enhances the value of goodwill.

Factor # 6. Trend in the Profit:

Earning capacity of a business is the most important one. When there is an upward trend in the profits, naturally it is extra value over and above the net value of the assets employed and arising out of past connections, continued prosperity and reputation and the expectation that the same profit earning capacity as in the past will be maintained in the future, by reason of the old customers continuing to deal with the firm in spite of the change of proprietorship.

Factor # 7. Possession of Patent and Trade Marks:

The products, branded with Trade Marks, registered with the Registrar of Patents and Trade Marks, prevents and distinguishes rival products from its product. The object is to acquire monopolistic rights, which create goodwill.

Factor # 8. Capital:

When the profits of a business is more in relation to the investment of capital, the value of goodwill is higher than the business earning less profits with huge amount of investment. In other words, the Return on Investment is more than the normal return, the value of goodwill is higher.

Factor # 9. Government Patronage:

When a business enjoys the patronage of Government, people are willing to buy the products of such a company. Thus goodwill increases.

Factor # 10. Other Factors:

There are many other factors which influence the value of goodwill, say, for instance,

i. Secret and successful manufacturing process.

ii. Customers’ patronage.

iii. General economic conditions.

iv. Favourable Government regulation.

v. Good labour relations.

vi. Favourable Tax policies.

vii. Absence of competition.

viii. Political stability.

ix. Availability of raw materials.

x. Favourable market conditions.

xi. Long Term Contracts etc.