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ABSTRACT:
This paper contemplates not only the goodwill of a firm but also whether the goodwill of a firm can be sold or not. Goodwill is incorporeal property because it can not be seen or felt. The goodwill of a firm in simple terms denotes the reputation of the firm in the market and its hold in the marketplace. Goodwill is very significant for a firm to build its brand value in the customer's eyes, which makes them stand out from its competitors. Many times there is confusion, whether the goodwill of a firm can be sold or not, with the help of this paper the researcher finds a way out that yes it can be sold. Not only goodwill can be sold but also certain rights are transferred to the new partner. This paper explains what is the nature of goodwill, how it is calculated, what are the factors that affect goodwill.
KEYWORDS- Goodwill, incorporeal property, assets, sold, firm, marketplace, customers.
INTRODUCTION:
Goodwill is incorporeal property, it is intangible because its existence is neither visible nor tangible. It is an asset of a business that may be bought and sold in association with the business. Goodwill means the reputation or status of the firm in society. Essentially goodwill of a firm is its standing in the economy its good repute. It can also be termed as brand value and simply the quantification of this brand value. Goodwill is a marketplace advantage of customer backing and loyalty developed with the continuous business under the same name over a period of time. It is also termed as the reputation of firm which enables it to earn higher profits in comparison to the normal profits earned by other firms in the same business. The goodwill of a firm can be sold just like any other asset.
METHOD:
The method used for this research paper was Doctrinal method of research wherein one rely on text or content available in various journal, magazines, and blogs. This monograph completely excludes the primary source of data viz., questionnaire to individuals. The method opted encompasses around information available in the public and on various websites having the reference of the aforementioned topic.
RESEARCH OBJECTIVES:
1. To explain the concept of the goodwill of a firm.
2. To find whether goodwill of firm can be sold.
RESEARCH QUESTIONS
1. What is the goodwill of the firm?
2. Whether goodwill of the firm can be sold?
Goodwill of firm:
The goodwill of a firm is an incorporeal property associated with the purchase of one company by another or in other terms known as merger and acquisition. Specially goodwill is recorded in a condition in which the purchase price is higher than the sum of the fair value of all tangible assets and intangible assets purchased in the acquisition. Some examples of goodwill can be termed as brand name, good customer relations, good employees relation and any patents and so on.
Nature of goodwill:
It is incorporeal property because it can not be seen or touched.
Goodwill must have characteristics of assets i.e., must have some clearly identifiable value.
The asset has future economic benefits.
Value must be measurable.
How goodwill is calculated:
To calculate goodwill there is a formula given i.e.,
P-(A+L)
Here,
P = Purchase price
A= Fair market value of the assets
L= Fair market value of the liabilities.
Factors that affect the value of Goodwill:
Business Location- Location of business is very important because it will have a more favorable chance of higher goodwill than a business that is located in a remote area.
Quality- A business that provides quality goods and services stands a great chance of earning goodwill as compared to the one that doesn’t provide good quality.
Nature of Business- The type of products that a business deals with, the level of competition in the market, demand for products, and the regulations impacting the business. A business having a positive outcome in all these areas will have greater goodwill.
Efficient Management- The efficiency of management leads to an increase in profit of the business that enhances the goodwill of the business.
Risk in Business- A business that has less risk has a better chance of creating goodwill than a higher-risk business.
Capital- A firm that has a return on investment along with lesser capital investment will be considered by buyers as more profitable and have more goodwill.
Contracts- A firm enjoys high goodwill when it has access to favorable contracts for the sale of products.
Trademark and Patents- Firms that have patents and trademarks will enjoy a monopoly, which contributes towards the goodwill of the firm.
The necessity for valuation of goodwill:
1. Admission of a partner
2. Death of a partner
3. Dissolution of business involving the sale of the business as a trading concern.
4. Consolidation of the partnership firm.
SALE OF GOODWILL:
The goodwill of a firm can be sold just like any other asset. Goodwill can be sold even to a partner (new partner) or even an outsider. The sale is divisible among all the partners of the firm in their profit-sharing ratio unless decided otherwise. This sale of goodwill gives certain rights to both buyers as well as sellers.
Rights of the buyer:
The buyer can use the firm name .
The buyer can claim the benefit of any covenant by a partner not to carry on any competing business.
The buyer can trade as his vendor’s successor.
The buyer can even restrain the seller of the goodwill from being in contact with these customers.
The seller of the goodwill also has certain rights, the right to enter into a competing business. If restrain of trade is decided amongst the parties at the time of sale then the seller does not have such rights.
Goodwill can be sold in the sales of contract and will be looked at by the ordinary rules of the contract law.
CASE LAWS:
In the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), the Hon'ble Supreme Court held.
That no business commenced for the first time possesses any goodwill from the start. Goodwill is generated as the business is carried on, and may be augmented by the passage of time.
The court observed as follows-
Goodwill denotes the benefit arising from link and reputation. A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may influence one business, another may dominate in another business. Its value may change from one moment to another, depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business honesty of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introducing to an old customer and agreed absence of competition.
CONCLUSION:
Goodwill is a significant element of any firm whether it is big or small, which leads to an increase in the reputation of the firm in the market. At this time every firm is dependent upon intangible assets for its survival and growth. Few examples of goodwill as mentioned in this paper viz., brand value, good relation with the customer as well as employees of the firm aids any firm to grow its profit. Many a time there is confusion that the goodwill can be sold or not, so the answer is yes, that it can be sold just like other assets of the business. Goodwill can be sold to a partner or any outsider of the firm as the case may be.
Therefore here the conclusion of this paper is that the goodwill of a firm is an incorporeal property associated with the purchase of one company by another or in other terms known as merger and acquisition, and just like other assets it can also be sold.
REFERNCES:
- BYJU, https://byjus.com, (last visited Mar 10, 2021)
- MCA , https://www.mca.gov.in, (last visited Mar 11, 2021)
- TOPPR, https://www.toppr.com,(last visited Mar 10, 2021)
- MONDAQ, https://www.mondaq.com,(last visited Mar 11, 2021)
- CASEMINE, https://www.casemine.com, (last visited Mar 11, 2021)
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