Business Marketing Advertising

You have probably read in the newspapers about the big mergers that are being formed. One of the difficulties which the accountants working on one merger have had to solve is determining the figure at which the good will of each concern should be capitalized.

One plan considered was to multiply the average earnings over a period of five years by five, and set that amount up as good will. But objections have been raised that such an amount is far too small ?that the earnings should be extended over at least a ten-year period. Others wanted to put the profits on a 6 per cent basis, and so on.

A few years back, when Montgomery Ward & Company floated a new stock issue, they estimated the goodwill value of the business as being equal to its total assets, although this particular concern does not capitalize its good will on its balance sheet.

The fact is that there is no fixed rule which can be followed in arriving at a valuation of good will, but roughly speaking, it ought to be in the neighborhood of ten times the annual profits of a normal year, sub?ject to deductions or additions according to the nature of the business and how deep-rooted the good will happens to be.

So you see every account in your territory has a capitalized value which is far greater than the profit it nets on an occasional sale. A man who gives you a thousand dollars in orders each year, on which your house makes a profit, we will suppose, of fifty dollars, has a capitalized good will value between five hundred and one thousand dollars.

If you do anything to cause that buyer to stop buy?ing your house has to stand a loss, not of the immediate profit as we so often think, but of the capitalized value of that account. In other words, the worth of the business as a whole, in the event of a merger or sale of assets, would be reduced just that much.