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Follow on Google News | How Do You Measure Goodwill According to Expert Business BrokersMeasuring goodwill is always a touchy issue, yet a common one during the valuation process. It's important to understand the methods used to understand it's function.
By: Achim Neumann To understand the concept of Goodwill, it’s important to look at the methodologies used by various valuation companies to establish the value of a company as a whole. Once this is established the components can be broken down. Typically, a company is valued by a multitude of factors, which can be roughly grouped into balance sheet-based and income statement-based categories. Or more specifically, asset-based and cash flow-based. If the cash flow-based valuation is less than the asset-based valuation, the owner is usually better off liquidating the company’s assets than selling the company as an ongoing concern (setting aside for a moment the discount effect for selling the assets). “However, generally, the cash flow based-valuation, based on several different methods of assessing cash flow, will exceed the asset-based valuation. In other words, there is a “premium” above the assets, or the Goodwill.” says Neumann. “Specifically, if the cash flow-based valuation arrives at a value of, say, $6.3m, but the (tangible) assets are $3.9m, then the resulting Goodwill is $2.4m. One concern business owners have is why there is no Goodwill even though the company has various assets that the owner considers to be Goodwill, such as a customer list, software programs and so on. “Realistically, a buyer will only attribute Goodwill to these assets if they produce cash flow, now or in the future,” says Neumann, “and the focus here is more on ‘now’. But, there are certainly also exceptions, for example, patents or inventions that will create significant cash flows in the future.” Another issue frequently expressed is the comparison of ratios and Goodwill between a midsized, privately held company and publicly held companies. As a very rough rule of thumb, a price/earnings valuation of privately held companies is close to half of publicly held companies in a similar industry or market sector. Finally, there is Uncle Sam. “Once there is an agreement between the buyer and seller of a company, it will be important tax wise as to how the Goodwill is allocated,” says Neumann, “as the depreciation rates differ among different asset classes, and consequently, this will have an impact on the future owner’s cash flow.” Naturally, there are conflicting interests. A buyer prefers to deduct as much upfront as ordinary deductions resulting in ordinary income for the seller; whereas a seller prefers an allocation to capital gain property, which allows a buyer to recover only through tax deductions over 15 years. Under Section 197 of the IRS code, the balance of the purchase price (aka ‘Goodwill’) In sum, given the large number of business transfers and valuations, there is a significant knowledge base with respect to Goodwill and the respective proper treatment in the business transfer process. A Neumann & Associates has advised many business clients in the past ten years to find an optimal solution for both parties and has appropriate experts available to further address issues in this complex arena. Posted in Appraisals, Business Broker NJ, Business Brokerage, Business Buyers, Business Sellers, Business Valuations, Business for sale NJ, Business sale by owner, Buy A Business, Buyer Financing, Commercial Real Estate, Confidentiality, Economic Stimulus, Economic Trends, Entrepreneur, Foreign Investments, Goodwill, How to price a business, Investing, Lending, SBA, Sell A Business, Trust Relationship, Uncategorized, Valuation of a company, business goodwill | No Comments » # # # A Neumann & Associates, New Jersey, is one of the most respected middle market brokerage firms in the country. From our New Jersey location, buyers and sellers have trusted Business Brokers Network BBN® and affiliates, since the early 1980s. End
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