Indian Partnership Act
Goodwill of a Partnership Firm
Goodwill is the value of a firm's name, reputation and connection: the attracting force that brings customers back. It is intangible, but it is real property, and the Act treats it so. Section 14 makes it property of the firm; Section 55 provides for its sale on dissolution and settles the rights of the buyer and the seller afterwards. The buyer takes the name and the connection and can stop the seller from taking them back; the seller may compete but not solicit the old customers. This note covers meaning, valuation, sale and the rights that follow.
Goodwill as property under Section 14, its sale under Section 55, valuation, and the rights of buyer and seller
1. What Goodwill Is
§ Meaning • The attracting force. Goodwill is the benefit and advantage of the good name, reputation and connection of a business; the whole advantage of the firm's reputation and connection which may have been built up by years of honest work. • Intangible but real. It cannot be seen or touched, but it has value and can be bought and sold. • It attaches to the business. It arises from location, reputation, quality, customer loyalty and the firm's name. • Not the same as the firm name. The name is one carrier of goodwill; goodwill is the wider asset. |
2. Goodwill as Property: Section 14
i. Expressly included. Section 14 provides that the property of the firm includes the goodwill of the business.
ii. Owned collectively. It belongs to the partners together, not to any one of them; a partner cannot appropriate it for himself.
iii. An asset in winding up. Because it is property, it must be accounted for when the firm is dissolved.
3. Valuation of Goodwill
Method | How it works |
|---|---|
Average profits method | A number of years' purchase of the average annual profits of the firm |
Super-profits method | A number of years' purchase of the super-profits, that is, the excess of the firm's profits over a normal return on the capital employed |
Capitalisation method | Capitalising the average or super-profits at a normal rate of return, and deducting the net tangible assets |
Agreed method | The partnership deed may fix the basis of valuation in advance, which avoids disputes |
- No single method is prescribed by the Act; the choice depends on the trade, and the deed may settle it.
4. Goodwill on Dissolution: Section 55
§ Section 55(1): sale In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with the other property of the firm. A partner may buy it. Any partner, like any outsider, may purchase the goodwill in the winding up. Subject to contract. The deed may provide that goodwill shall not be sold, or shall belong to a continuing partner, or shall be valued in a stated way. |
5. Rights of the Buyer and the Seller
The buyer of goodwill gets | The seller (a partner), s. 55(2) |
|---|---|
The right to carry on the business under the old firm name | May carry on a business competing with that of the buyer |
The right to represent himself as continuing the business | May advertise such competing business |
The right to the firm's connection and custom | May NOT use the firm name, subject to agreement |
The right to restrain the seller from using the firm name | May NOT represent himself as carrying on the business of the firm |
The right to restrain the seller from soliciting old customers | May NOT solicit the custom of persons dealing with the firm before its dissolution |
- The balance struck. The buyer paid for the connection and is protected against the very persons he bought from; but free competition is preserved, so the seller may set up in the same line, provided he does not filch back what he sold.
6. Restraint on the Seller: Section 55(3)
§ A valid restraint • The rule. A partner who sells the goodwill may agree with the buyer that he will not carry on any business similar to that of the firm within a specified period or within specified local limits. • Valid if reasonable. Notwithstanding Section 27 of the Contract Act, such an agreement is valid if the restrictions imposed are reasonable. • Reasonableness is judged by the trade, the area of the firm's connection, and the time needed to protect the goodwill that was bought. • Why it is allowed. Without it, the buyer's purchase could be worthless, because the seller could immediately draw the custom back. |
7. Goodwill and the Firm Name
i. Related but distinct. The firm name is one of the things that carries goodwill; goodwill is the whole attracting force of the business.
ii. Selling goodwill. A sale of goodwill ordinarily carries the right to use the firm name, unless the contract provides otherwise.
iii. Protecting the name. Registration of a firm name gives no exclusive right to it; protection comes from trade mark law and the action for passing off.
8. Frequently Asked Questions
Is goodwill the property of a firm?
Yes. Section 14 expressly includes the goodwill of the business in the property of the firm.
Can goodwill be sold on dissolution?
Yes. Under Section 55, subject to contract, goodwill is included in the assets and may be sold separately or with the other property.
Can a partner who sold the goodwill compete with the buyer?
Yes, he may carry on and advertise a competing business, but he may not use the firm name, represent himself as carrying on its business, or solicit its old customers.
Is an agreement restraining the seller of goodwill valid?
Yes, if the restrictions as to period and place are reasonable, notwithstanding Section 27 of the Contract Act: Section 55(3).