Valuation of Goodwill

Presented by:Ashutosh MishraMBA-1st semester

What is Goodwill ?

фGoodwill is seen as an intangible asset to any company or organization.

фGoodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology. -investopedia.com

фGoodwill is calculated as the difference between the value of entity as a whole & the value of its Net Tangible Assets (NTA).

Valuation of Business

Net asset value, discounted cash flow (of future earning estimate), price-earnings multiple, etc are popular options of business valuation.In the service industry we come across EBITDA (Earnings Before Interest Tax Depreciation & Amortisation) multiplied by a commonly used factor (depending on the growth potential, country, etc.) For example, in US labs, the factor is 7 to 8. A lab with an EBITDA of $10 Million per year would sell for around $70 Million. Now if the resale value of all the tangible goods (building, equipment, fixtures, etc) was $45 Million, the difference ($25 Million) accounts for 'goodwill'.

Section 55 of the Income Tax Act specifically laid down goodwill as a capital asset, the sale of which would attract capital gains tax. The fact that goodwill is a capital asset gives rise to useful ideas for tax planning.

Level of Goodwill Valuation

The level of goodwill implied by valuation should always be assessed for reasonableness. A reasonable level of goodwill varies from company to company.

Real Time Case

Here we see the role of goodwill in legal practice,

The components which give rise to goodwill are :-

name and reputation of the practicepotential to generate future incomeclient loyaltypartner and staff continuitypractice location.

The circumstances which require the valuation of goodwill are:-

incorporation of a legal practice acquisition/disposal of a practicepartners joining/leaving a practice.

Valuation of goodwill is a very subjective matter and in the

majority of cases there is no right or wrong answer. In certain

instances a low valuation may be more beneficial than a higher

one, and vice versa.

Valuations done !

In R. C. Cooper vs Union of India (AIR 1970 SC 564), the Supreme Court observed that goodwill is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation, location and other features.When goodwill is sold, explained the Calcutta High Court in Gulaldas Mullick Vs. Ganeshdas Damani (AIR 1957 Cal 280), it would enable the purchaser to trade as recognised successor to the business.

The International Accounting Standards 22 on business combinations, AS 14 on

amalgamations and FRS 10 (UK GAAP) on business combinations deal with problem of accounting for goodwill and other intangible

assets. According to IAS 38, internally-generated goodwill

should not be recognised as an asset at all. As per IAS 22, cost of

goodwill represents a payment made by the buyer in anticipation

of future profits.

A Noticeable Fact

Good Will Hunting

“Some people can

never believe in

themselves, until

someone believes in

them.”

A Movie directed by Gus Van Sant having Robin

Williams,Matt Damon & Ben Affleck as the casts that was released on 4th.Mar1998 in

France.The movie won 2 Oscars.

Another 16 wins & 35 nominations.

References

The Valuation of Businesses , Shares & other Equity –Wayne Lonergan

The Internet