What is the first step in calculating the value of goodwill through the capitalization of average profits method?

Ascertain the average profits based on the past few years' performance

The first step in calculating the value of goodwill through the capitalization of average profits method is to ascertain the average profits based on the past few years' performance. This involves analyzing the financial records and performance of the firm over a specific period, typically several years. By considering the profits earned by the firm over this period, an average value can be determined. This average profits figure serves as the basis for further calculations in the goodwill valuation process. It is important to assess the average profits accurately as it forms a fundamental component in determining the value of goodwill. The average profits provide insight into the earnings potential of the business and help establish a basis for capitalizing them to derive the goodwill value.