said that the dummy directors who solemnly voted that the properties acquired were worth the price fixed by the promoters were neither competent to pass thereon nor independent enough to make their decision binding.

Computation of Good Will: The following comments and the charts appearing on page 133 are reproduced by permission from System for January, 1912:

Despite all the sound reasoning of advertising experts and accountants, despite all the beating of tomtoms by underwriters and passionate promoters, good will is still the fourth dimension of business. It is there, but the difficulty lies in making another see it where you see it and in making him see it as large as you see it. For, like the fourth dimension, you can't feel it with your hands. The courts protect it, declare it to be as tangible an asset as real estate; hard-headed business men, as well as luminous theorists, insist that it be regarded as so much property. It is. It should be. But how many business men have any that they can sell for cash in hand? Proportionately, very few. Negotiable good will is the exception rather than the rule in business. Every man is positive he has some until he tries to exchange it for cash. Then the majority discover that either they have much less than they dreamed or none that is salable.

Lately, the proprietor of a big New York department store suffered a shock. He had an excellent location, he had been a heavy advertiser, but he paid his bills in four or five months. Consequently, he paid more for standard stock than did his competitors; manufacturers and jobbers came to him with only riffraff and odds and ends not to be placed elsewhere, and the public tired of his goods. In short, the good will bought and paid for in location and advertising foundered and sank on a sea of ill-favored goods. He had to choose between selling out at the precise cost value of his stock and bankruptcy. He sold.

Can the value of good will be anything more than each man's guess? Yes, there are rules for estimating it, and these are coming more and more into use. First, however, it is not unwise to make sure that you have some negotiable good will, for this depends upon varying contingencies: upon the degree to which it can be transferred, upon the public favor of each individual business, upon numberless other factors whose vital value may change with the moon. The most significant of these other factors which go to make up good will can be listed. They are trade marks, trade names, competition, advertising, merit of goods, location, franchises, patents. Location sometimes counts for more than all these other factors put together— and, again, is dwarfed to insignificance by a single one of them.

These, then, are the props upon which good will is reared. But how can its value be determined in dollars and cents?

The first steps are as sound and firm as those in a government building. The net earnings of the business must be learned.

One normal year may be taken by itself or from three to five years of

Some of the factors that enter into a computation of the "good will" of a business. For obvious reasons these factors vary greatly in importance, dependent upon the peculiar conditions that affect the business that enters into the transaction.

Surplus Profits for

One Year

Usual Estimate of "Good Will"

For Professional
Practice

For Manufacturing
Business

For Wholesale or Retail Trading Business

For Quasi Monopoly or Similar Business

For Established
Monopolies

The first in computing "good will" is determine net earnings of a bulsiness, from which sum is deducted the interest on capital actually employed and the value of the owner's services. The result multiplied ordinary by two, but sometimes by many times that amount, has been accepted as the Value of the "good will.".

uneven earnings may be averaged. It matters not so long as the probable net earnings for the forthcoming year are at hand to serve as a basis. From these, all authorities agree, two deductions should now be made: one is the interest at six or seven per cent upon capital actually employed, the other, a sum equivalent to the owner's services to the business.

Here we have the actual surplus profits of the business, and right here we have to take to the ladder of theory. How many times these surplus profits is good will worth?

In the case of a large retail dry goods store this is what actually happened: The business was taken over at one hundred cents on a dollar of the cost value of stock, at fifty cents on a dollar for fixtures. Then the purchaser agreed to pay $50,000 annually for the next five years for the good will. This $250,000 may loom large to you, but the business netted $125,000 annually on a working capital of a million. Hence, the good will was figured at only twice the yearly net profits-somewhat less, in fact, considering the interest lost through partial payments.

At the risk of disappointing many who are figuring their good will higher because they have never attempted its sale, I must state that, in practice, the favorite multiplier in use appears to be 2. The business brokers, accountants, adjusters, and lawyers with whom I talked seemed to settle upon this figure, regardless of the nature of the business, provided only it were not a monopoly. One New York lawyer whose firm formerly negotiated the sale of many large businesses said: "Most people figure their good will at twice the annual profits. If their stock is worth $40,000 and they net $20,000, they want $80,000 for their businesses."

The good will of many a business is computed at twice its earnings without making the prescribed deductions for interest on capital and for owner's services. Thus the accredited rules for computing it are constantly being broken and exceptions discovered. An investigation of the actual value of good will is largely, at best, a study of exceptions. Average sales of good will at normal prices take place all the time, but nobody hears of them; the abnormal ones alone are reported and serve to mislead. Business men hear of these exceptional prices, have no knowledge of the average ones, and tend to make their own estimates too high. This increases the difficulties of a subject of itself easily the most difficult in all business. Last summer one of the leading members of the New York bar served as referee on a case in which it was necessary to set a dollars-and-cents' value on good will. He reported to the court: "Sales of such a commodity are so rare that the inquiries that were addressed on the trial to the experts who testified brought no help." The good will this attorney was compelled to value was that of a firm of architects who had planned, among other structures, the Manhattan Opera House. This lawyer ended by averaging the earnings for the entire five and one half years these architects had been carrying on business, and then multiplying these average yearly earnings by 2. It is indicative to observe how often one finds this figure 2 used in practice, particularly in nearly all the varied forms of retail business.

Most buyers of small stores are paying, through ignorance, a higher

price for good will than they perhaps realize. When they neglect to deduct for owner's services and interest on working capital, it amounts to multiplying the actual profits by a larger number than two. But these small stores are generally taken over by men untrained in these lines, by men eager to invest their small capital where it will earn them a living, and, hence, willing to pay a premium for the good will. But in pursuits for which a special training is necessary, the market is narrow and the owner usually has to sell to a competitor, thoroughly informed and not likely to overvalue any one's good will except his own.

Just what is good will?

No one definition has ever been fashioned fully to clothe it in all its varying forms-not since advertising became the pacemaker in this age of speed and guided business to new and quicker thoroughfares. One knows that it exists. In special instances one can determine definitely just what caused it to be, but whim as well as habit sometimes has a hand in its making. You may catch it or you may lose it with a slogan. One candy manufacturer may gain it by advertising; another without. This storekeeper may secure it by manifesting a partiality and personal interest in the affairs of his customers; that one may achieve the same end by caring for nothing except the merit of and the satisfaction given by his goods.

Usually, good will represents the industry, judgment, tact, and courage of the man at the top as reflected in his clerks, salesmen, or workmen. As Emerson put it: "Every successful business is the lengthened shadow of some one man." Long after the Fifth Avenue Hotel was left hopelessly downtown by the mad race north of hotels and theaters in New York, it held its own because its courteous clerks had made so many warm and personal friends. These thought little of the increasing inconvenience of the hotel's location.

In many respects good will is the life insurance of business. Annually the shrewd merchant or manufacturer invests in this form his extra energies and convictions. As a result, in the event of his own sudden death, sometimes something passes on to his heirs more highly valuable than his mere store or plant. And on the other hand, if he lives to that ripe age when he begins to think of retiring, he finds coming to him, as with an endowment policy, the cash surrender value of his good will.

Sinking Funds: The caption "Sinking Fund," or any other fund, should always represent an asset, and inquiry should always be made (whenever the nature of the undertaking raises the question) as to the disposition of this account. In many mortgages, especially when secured by coal, ore, lumber, etc., it is provided that a certain amount, based on the production, shall be paid to trustees for the purpose of extinguishing the debt at or before maturity. These amounts properly appear on the balance sheet as assets, and it should be clearly shown what

investments have been made and the cash, if any, which remains uninvested.

This principle is not affected in theory by the fact that some sinking funds instead of being actual assets, are deductions from liabilities. For instance, a sinking fund may be used in buying up a corporation's own bonds. The actual facts are better expressed if the bonds so held (and which may be canceled) are deducted from the total outstanding, rather than shown as an

asset.

A certificate from the trustees as to the state of the fund is sufficient evidence for the auditor, so far as the examination of the cash and securities is concerned.

If the bonds have been surrendered to the company, the auditor should examine them and note whether proper safeguards are provided to prevent improper use thereof.

The creation of sinking funds and other points in connection therewith is discussed on page 177.

Fund and Other Permanent Investments: In this class are included the securities, held for income purposes, or as investments of sinking, reserve, and other special funds.

The element of permanency consists in the purpose of the investments, i. e., they are not bought and sold with a view to a profit in the turnover, nor are they held as a temporary reserve to be instantly converted into cash.

In many instances the market price at a particular date may be fixed by a few small transactions which have little bearing on actual values, owing to the limited demands, and perhaps an urgent necessity to sell on the part of an unfortunate investor. The plan of valuing bonds which have been purchased for permanent investment advocated by leading authorities on the subject is to compute their value on the basis of the effective, or actual rate of interest, if held to maturity as determined by the prices at which they were originally purchased.

Bonds are rarely purchased at par or face value. To make the amount of the purchase equal the par value at maturity requires an adjustment of accounts. The scientific method of adjustment is known as amortization or accumulation and involves a debit or credit to interest account at each periodical adjustment of the book value, in accordance with the effective