Which Factor does not Affect the Value of Goodwill?

The correct answer is Option (3) → Location and Address of Partners

Goodwill is the value of a firm’s ability to earn more than normal profits, so the factors that affect it are the ones that affect the firm’s earning power: the nature of its business, where the business is located, how efficiently it is managed and how much competition it faces.

• Option (1) Nature of business — A factor affecting goodwill. A firm making high value added products or with a stable demand earns more and has more goodwill.

• Option (2) Market situation — A factor affecting goodwill. A monopoly or limited competition allows high profits and so a higher goodwill.

• Option (4) Efficiency of management — A factor affecting goodwill. Good management brings high productivity and low costs, and so higher profits.

The recognised factor is “Location” — the location of the business, such as a central place with heavy customer traffic. The option turns it into the “Location and Address of Partners”, where the partners live, which has no effect on what the business earns; that is why it is the odd one out. Read every word of a familiar term: one added phrase can turn a right factor into a wrong one.