what does exactly 'number of year purchase' mean in the valuation of goodwill?
As you know that starting a new business and purchasing an established business are two very different concepts. A new business requires a lot of hard work and dedication to bring it on par with an already established business in the same industry.
When a partnership firm purchases goodwill of another firm, then automatically the firm is getting the benefits of past hard work of the seller-firm. This enables the firm to have a great leap forward and that too without actually putting in much effort.
Number of years purchase refers to time-lag that is required by a new business to reach the level of an old already-settled and well-renowned business. This ‘number of years’ varies from industry to industry and is purely determined on the basis of estimates and past-trends of the firms of an industry.