A well-established business develops an advantage of good name, reputation and wide business connections. This helps the business to earn more profits as compared to a newly set up business. In accounting, the monetary value of such advantage is known as “goodwill”.

The main factors affecting the value of goodwill are as follows: 

• Nature of business: A firm that produces high value added products or having a stable demand is able to earn more profits and therefore has more goodwill. 

• Location: If the business is centrally located or is at a place having heavy customer traffic, the goodwill tends to be high. 

• Efficiency of management: A well-managed concern usually enjoys the advantage of  high productivity and cost efficiency. This leads to higher profits and so the value of goodwill will also be high. 

• Market situation: The monopoly condition or limited competition enables the concern to earn high profits which leads to higher value of goodwill. 

• Special advantages: The firm that enjoys special advantages like import licences, low rate and assured supply of electricity, long-term contracts for supply of materials, well- known collaborators, patents, trademarks, etc. enjoy higher value of goodwill.