act201 group presentation on goodwill valuation
TRANSCRIPT
PRESENTATION
GOODWILL
ON
VALUATION
INTRODUCING US
Gaulib HaidarSudipto Bala
Shahed Morsed Jaigirdar Gloria Mollik
Yousha Mohan
151 0898 630151 0885 630151 0641 630143 1020 030151 0478 630
Goodwill is the excess of purchase price over the fair market value of a company's identifiable assets and liabilities.Goodwill is an intangible asset for a business concern. It is the Benefit and advantage of the “good name”, “reputation”
and “connection” of the business. It is the Attractive force which “brings in custom”. It is the one thing which Distinguishes an “old established
business” from a “new business” at its first start.
DEFINE GOODWILL
CLASSIFICATION OF GOODWILL
Goodwill can be classified into types:
Corporate Goodwill
PersonalGoodwill
2
Nature of business
Favorable location
Capital requirements
Life of the business
Trade nameManagerial
abilityProfit trendsQuality of
products
FACTORS DETERMINING THE VALUE OF GOODWILL
Nature of businessFavorable locationCapital
requirementsLife of the business
METHODS OF GOODWILL VALUATION
Goodwill ValuationMethods:
Average Profits Method
Super Profits Method
Capitalization Method
AVERAGE PROFIT METHOD
AVERAGE PROFITS METHOD
Before calculating the average profits the following adjustments should be made in the profits of the firm:a. Any abnormal profits should be deducted from the net profits of that year.
b. Any abnormal loss should be added back to the net profits of that year.
c. Non operating incomes i.e. income from investments etc. should be deducted from the net profits of that year.
×Goodwill =
Average Profits
Number of years of Purchase
Lets look at a simple example:
Following additional information is available:1. In 2008 the company suffered a loss of $1,000,500 due to fire in the
factory2. In 2009 the company earned an income from investments outside the
business $4,500,2503. Goodwill will be valued at three years of purchase of average profits of last 5
years.
“A” Company Ltd
“B” Company Ltd
$39,650,000
$10,000,000
$12,250,000
$7,450,000
($2,450,000)
$12,400,000
Lets look at a simple example:
Following additional information is available:
1. In 2008 the company suffered a loss of $1,000,500 due to fire in the factory
2. In 2009 the company earned an income from investments outside the business $4,500,250
3. Goodwill will be valued at three years of purchase
Total profit in the past five years
Solution:
Lets look at a simple example:
Solution:
Following additional information is available:
1. In 2008 the company suffered a loss of $1,000,500 due to fire in the factory
2. In 2009 the company earned an income from investments outside the business $4,500,250
3. Goodwill will be valued at three years of purchase
Total profit in the past five years
$39,650,000
Lets look at a simple example:
Solution:
Following additional information is available:
1. In 2008 the company suffered a loss of $1,000,500 due to fire in the factory
2. In 2009 the company earned an income from investments outside the business $4,500,250
3. Goodwill will be valued at three years of purchase
Total profit in the past five years
$39,650,000
$39,650,000
$1,000,5
00($4,500,25
0)
$36,150,250
Total Profits after adjustments
Lets look at a simple example:
Solution:
Following additional information is available:
1. In 2008 the company suffered a loss of $1,000,500 due to fire in the factory
2. In 2009 the company earned an income from investments outside the business $4,500,250
3. Goodwill will be valued at three years of purchase
Total profit in the past five years
$39,650,000
$36,150,250
Total Profits after adjustments
$7,230,0505
Lets look at a simple example:
Solution:
Following additional information is available:
1. In 2008 the company suffered a loss of $1,000,500 due to fire in the factory
2. In 2009 the company earned an income from investments outside the business $4,500,250
3. Goodwill will be valued at three years of purchase
Total profit in the past five years
$39,650,000
=$36,150,2
50$7,230,050is the Average Profit
is the
Lets look at a simple example:
Solution:
Following additional information is available:
1. In 2008 the company suffered a loss of $1,000,500 due to fire in the factory
2. In 2009 the company earned an income from investments outside the business $4,500,250
3. Goodwill will be valued at three years of purchase
$7,230,050 Average Profit
Lets look at a simple example:
Solution:
Following additional information is available:
1. In 2008 the company suffered a loss of $1,000,500 due to fire in the factory
2. In 2009 the company earned an income from investments outside the business $4,500,250
3. Goodwill will be valued at three years of purchase
$7,230,050Average Profit =3 $21,690,150
Thus “A” Com Ltd would pay
as the price of Goodwill earned by “B”
Com Ltd.
Lets look at a simple example:
Solution:
Following additional information is available:
1. In 2008 the company suffered a loss of $1,000,500 due to fire in the factory
2. In 2009 the company earned an income from investments outside the business $4,500,250
3. Goodwill will be valued at three years of purchase
$21,690,150
SUPER PROFITS METHOD
SUPER PROFITS METHOD:
are the profits earned above the normal profits.
Under This method is calculated on the basis of
Super ProfitsSuper Profits
“Goodwill”
Investment Rate of Return$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
$1,100,000
Super Profit
SUPER PROFITS METHOD:The normal Rate of Return is 20% and your investment in the business is $1,000,000
Normal profits should be $200,000
Luckily Net profit was $230,000
This Excess of profit earned over the normal profits is your
$230,000 - $200,000 = $30,000
Super Profit
CALCULATING GOODWILL SUPER PROFITS METHOD:
At FirstCapital Invested Normal Rate of Return1 oo
Normal Profits
Super Profits
CALCULATING GOODWILL SUPER PROFITS METHOD:
ThenActual Profits
Normal Profits
Super Profits
CALCULATING GOODWILL SUPER PROFITS METHOD:
Lastly
Super Profits
CALCULATING GOODWILL SUPER PROFITS METHOD:
Number of YearPurchased
=GOODWILL
For example:
Year Profit/Loss ($)
2005 10,000,000
2006 12,250,000
2007 7,450,000
2008 5,400,000
ABC Ltd
Capital $50,000,000
Normal Rate of Return 10%
Total Profit $35,100,000
Year Profit/Loss ($)
2005 10,000,000
2006 12,250,000
2007 7,450,000
2008 5,400,000
ABC Ltd
Capital $50,000,000
Normal Rate of Return 10%
For example:
++
+
$8,775,000
Total Profit $35,100,000
For example:
4 = Is the Average Profit
For example:
Super Profit
- Normal Profit
Average Profits $8,775,000Capital $50,000,000
Normal Rate of Return 10%
-$5,000,000
For example:
Super Profit
$8,775,000-$5,000,000
$3,775,000
$3,775,000
For example:
$3,775,0003
$11,325,0
00GOODWILL
CAPITALIZATION METHOD
CAPITALIZATION METHOD:
Calculating Goodwill under Capitalization
method
Capitalization of Average Profits
Method
Capitalization of Super Profits
Method
Under this method we calculate the average profits and then assess the capital needed for earning such average profits on the basis of normal rate of return. Such capital is called capitalized value of average profits.CAPITALIZATION OF AVERAGE PROFITS METHOD:
Average profit
100
Normal Rate of ReturnCapitalized Value of Average Profits=
Asset -LiabilitiesCapital Employed=
GOODWILL
Normal Rate of ReturnAverage profit
Under this method we calculate the average profits and then assess the capital needed for earning such average profits on the basis of normal rate of return. Such capital is called capitalized value of average profits.
CAPITALIZATION OF AVERAGE PROFITS METHOD:
100
Capitalized Value of Average Profits=
Asset -LiabilitiesCapital Employed=
Capitalized Value of Average Profits
Capital Employed
- =
Lets look at a simple example:
XYZ Inc.
Total Asset Total Liability Average Profit
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
$1,100,000 1,000,000
$500,000
60,000
XYZ Inc.
Normal rate of return is 10%.
GOODWILLCapitalized Value of Average ProfitsCapital Employed- =
Normal Rate of ReturnAverage profit
100
= $60,000 10
$600,000
Lets look at a simple example:
GOODWILLCapital Employed- =
100
=
Asset - Liabilities=
$60,000 10
$600,000
$1,000,000 $500,000 $500,000
Lets look at a simple example:
GOODWILL- =
- =
$600,000
$1,000,000 $500,000 $500,000
Lets look at a simple example:
GOODWILL- =$600,000$500,000
Lets look at a simple example:
GOODWILL=-$600,000 $500,000$100,000
Lets look at a simple example:
Is the Calculated
Under this method first of all we calculate the Super Profits and then calculate the capital needed for earning such super profits on the basis of normal rate of return.CAPITALIZATION OF SUPER PROFITS:
Super Profit 100
Normal Rate of Return GOODWILL=
CALCULATING GOODWILL SUPER PROFITS METHOD:
At FirstCapital Invested Normal Rate of Return1 oo
Normal Profits
Super Profits
CALCULATING GOODWILL SUPER PROFITS METHOD:
After ThatActual Profits
Normal Profits
Lets look at a simple example:
ABC Inc.
Capital Profit$0
$100,000
$200,000
$300,000
200,000
$50,000
ABC Inc.
Normal rate of return is 20%.
For example:
Super Profit
- Normal Profit
Average Profits $50,000Capital $2,000,000
Normal Rate of Return 20%
-$40,000
For example:
Super Profit
$10,000
$50,000-$40,000
For example:
$10,000
100
Normal Rate of Return GOODWILL=20
$50,000
For example:
GOODWILL=
WHEN IS GOODWILL VALUED?
WHEN IS GOODWILL VALUED?
When a company is buying another company.
When a partner is admitted.When a private limited
company is converted into a public limited company.
IMPORTANCE OF GOODWILL VALUATION
Increases the number of return customers and recommendations based on their pleasant
experiences.
IMPORTANCE OF GOODWILL VALUATION
Increases the number of return customers and recommendations based on their pleasant
experiences.
IMPORTANCE OF GOODWILL VALUATION
Increases the number of return customers and recommendations based on their pleasant
experiences.
IMPORTANCE OF GOODWILL VALUATION
A well-established business goodwill increases the chances of loan sanctions from a bank and the
interest of potential investors
IMPORTANCE OF GOODWILL VALUATION
In case of a blunder or mistake, people are more forgiving to a business based on the goodwill it garners, much like the mistakes of an individual with a 'good name' will be given
the benefit of doubt.
Balance
Sheet
HeyIts okay
IMPORTANCE OF GOODWILL VALUATION
The equity value and the accounting value of a business are greatly affected by the goodwill of that
business
IMPORTANCE OF GOODWILL VALUATION
Increases the number of return customers and recommendations based on their pleasant experiences.
Increases chances of loan sanctions from a bank and the interest of potential investors.
In case of a blunder or mistake, people are more forgiving to a business based on the goodwill it garners, much like the mistakes of an individual with a 'good name' will be given the benefit of doubt.
The equity value and the accounting value of a business are greatly affected by the goodwill of that business.
As mentioned in the beginning of this presentation, goodwill is one of the major intangible assets of any business. Greater the goodwill of a business, greater the value of its intangible assets and thus, greater the acquisition price in a takeover.
HOW TO DEVELOP GOODWILL
Quality Product and Services: Nothing is more important for the life of goodwill in a business than the standard and quality of the products and services it offers.
Unique Selling Proposition: A good business always has a USP by which it is identified - there has to be something in the business for people to be attracted to it.
Satisfied Customer Base: A customer is more likely to return or recommend the services of a business if he/she has a pleasant and satisfactory experience in the first instance. Following good business ethics goes a long way in impressing customers and investors.
Marketing and Advertisements: A business which is under the spotlight for the right reasons creates goodwill for itself. Offers, discounts and even Samaritan deeds in a business ensures its place in the good books.
Strategy and Management: Goodwill has to be deliberately developed and it is possible to do so only if the employees are well-trained, reputed and capable. A good strategy or 'game plan' is essential to keep the business on track and motivated.
Innovation and Expansion: For a business to be viewed as valuable, it has to be one step ahead of its competitors. Though it sounds clichéd, stagnancy has no place in the goodwill of a business.
Profits and Gains: Customers and investors are more willing to deal with a business if it is profitable or if they believe that it has the potential of making profits (given a chance).
AT THE END OF THE DAY GOODWILL PLAYS A KEY PART IN THE BUSINESS TRANSACTION. JUST LIKE HOW A MAN HAS HIS
REPUTATION, A COMPANY’S REPUTATION IS WHAT WE CALL
GOODWILL.GOODWILL DETERMINES HOW WELL THE BUSINESS IS ESTABLISHED. HAVING A HIGH GOODWILL VALUE WILL
ENSURE THAT IF YOU ARE SELLING YOUR BUSINESS THEN YOU WILL GAIN A LARGER AMOUNT FOR IT. SO BUILDING UP THAT
GOODWILL IS JUST AS IMPORTANT AS USING THE CORRECT METHOD OF VALUATING IT.
Conclusion