Goodwill question

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0.99 Coefficient of Determination

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.
 
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Paul Thomas, CPA

0.99 Coefficient of Determination said:
of the company.

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.
 
0

0.99 Coefficient of Determination

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.
 
P

Paul Thomas, CPA

0.99 Coefficient of Determination said:
is fair value another words for "book value" (or "equity" of the
company)?

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.


How is FMV calculated for a given company?
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.

since there is much divergence in calculating fmv, i would think
that there is much divergence in calculating Goodwill.

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).
 
T

TKnTexas

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.
 
J

J

TKnTexas said:
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.
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....
 
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TKnTexas

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
 
B

brecker

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.
 
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Paul Thomas, CPA

TKnTexas said:
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.



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.
 

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