In the super profit method, what is the first step involved in calculating goodwill?

Calculate average profit for past years

The average profits (simple or weighted) method of calculating goodwill operates on the assumption that a new business would not generate any profits in its initial years. Consequently, when someone acquires an existing business, they are expected to pay for the anticipated profits for the first few years in the form of goodwill. However, it is argued that the actual benefit for the buyer should not be based on total profits, but rather on the profits exceeding the normal return on capital invested in a similar business. This leads to the suggestion of valuing goodwill based on the excess profits, referred to as super profits. To determine goodwill using this method, the following steps are involved:
* Calculate the average profit.
* Determine the normal profit on the firm's capital by applying the normal rate of return.
* Calculate the super profits by subtracting the normal profit from the average profits.
* Calculate goodwill by multiplying the super profits by the specified number of years' purchase.
It's important to note that the firm's capital includes partners' capital, reserves, and surplus, while excluding fictitious assets and goodwill.