Question

What is meant by number of year’s purchase in the valuation of a firm’s goodwill?

Answer 1

Since the buyer’s efforts will begin to generate profits after a few years, the buyer of a business will benefit fully from the seller’s efforts for a few years. Therefore, the seller should get payment from the buyer for a few years’ worth of future revenues. The number of years’ purchase indicates how many years the company will continue to generate a profit due to its prior efforts.