Goodwill question

From what I understand, the goodwill is = purchase price - book value

of the company. Since the purchase price is the market capitalization (and maybe a small 10% premium due to the run up of price increases prior to a buyout), is goodwill = market cap - book value? So the majority of a firm's purchase price is goodwill, since 33% is book value, this implies that 67% is goodwill.

Reply to
0.99 Coefficient of Determinat
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"0.99 Coefficient of Determination" wrote

Compute it like this:

Purchase price of business

- fair value of tangible assets = goodwill

Goodwill is the price paid above the fair value of all the underlying assets you are buying.

Reply to
Paul Thomas, CPA

is fair value another words for "book value" (or "equity" of the company)? How is FMV calculated for a given company? since there is much divergence in calculating fmv, i would think that there is much divergence in calculating Goodwill.

Reply to
0.99 Coefficient of Determinat

"0.99 Coefficient of Determination" wrote

No - it's not. Book value of an asset will almost always be different than the fair market value of that asset. An example is a computer, purchased on December 30th for $1500 and fully depreciated (book value is $0 on December

31st), yet it has a secondary market value of really - close to $1500, it being just three days old and all on January 1st of the following year.

The same for the hundreds of thousands of asset items that may be part of a business purchase.

FMV of assets are generally obtained by appraisals, especially when real estate is involved. Specialists might be brought in to assign values to various pieces of manufacturing equipment. Again, these may be fully depreciated or carry a very small cost basis on the books.

I would think that people these days want to keep goodwill to a minimum. It's basically saying: "Hey!! Look at me!!! I paid too much for this business."

Components of goodwill could be 'workforce in place' (the value assigned to the existing, trained workers), 'client list' or 'existing customer base' (a good majority of these people will keep coming back no matter who the owner is).

Reply to
Paul Thomas, CPA

If this posted twice, my apologies.

I am not a CPA, nor do I play one on TV. However, I was working for a major national restaurant chain. The name apparently was very valuable at the time. The amount of goodwill was substantial. I was surprised though that the physical assets were revalued. I found this out when I had to check on the value of an particular asset for one of the restaurants. What should have been a zero book value wasn't, it had substantial value left. In speaking with the concept's controller (a CPA) she explained that only so much could be booked to goodwill.

Reply to
TKnTexas

I always believed that goodwill only arises on business acquisitions. One cannot account for internally generated goodwill by revaluation.

Please correct me if I am wrong....

Reply to
J

An acquisition was involved. It was a rather complex (to me anyway) ownership change. The parent company was bought. As a subsidiary our business was in conflict with the new owner's company, legal issues. We tried to do a self thing but ended up getting bought by the owner of national chain.

Goodwill was put on the balance sheet but not for the full amount of acquisition price-book value. Book value was revalued up. I really hated it because decisions were made to not replace worn out assets because they still had "life". So we continued to make repairs.

Hope this helps. TK

Reply to
TKnTexas

When a company is going to acquire another company, it is not that only so much can be booked to goodwill, it is that the purchasing company wants to minimize goodwill. An a GAAP basis, it can no longer be amortized, rather it is assessed for impairement. Second, I think the tax part is still amortized over 15 years.

Therefore, the purchasing company has incentive (generally) to over value the assets and minimize the amount of goodwill. However, in some cases, the opposite is true , for instance to show larger net income for a segment/division as a greater portion was booked to goodwill. Furthermore, companies that have intangible assets cannot really book the increase in value of some of those intangible assets when the value increases. Items like patents and other research/development items (not corporate name brand). However, when a company purchases those assets or acquires a company to get the technology, to say manufacture a product, they can capitalize the assets and amortize over the life of the estimated usage.

As for FMV - that is why there are companies that specialize in business valuation, mergers and acquisitions, etc. They assist companies in the process of valuing a company that they want to buy, or maybe have already and is just comes down to how to book the acquisition.

Reply to
brecker

"TKnTexas" wrote

In a purchase of assets, the assets are booked at their purchase price. That price may often be higher than the book or carrying values of the business who was bought out.

Reply to
Paul Thomas, CPA

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