ACT201 Group Presentation on Goodwill valuation

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