Goodwill in Valuations

[tommymac]

I'm looking at a company (SGM) which has a large amount of Goodwill.

In your opinions, do you include Goodwill in valuing companies or do you exclude Goodwill?

I'm in two minds about this.

Thanks
Tommac

 

[ducati916]

I'm looking at a company (SGM) which has a large amount of Goodwill.

In your opinions, do you include Goodwill in valuing companies or do you exclude Goodwill?

I'm in two minds about this.

Thanks
Tommac

You must include it [Goodwill] within your valuation for the following reasons;

Goodwill represents the premium paid by an acquiring company for the assets acquired. Thus, the acquiring company in this case SGM believes that the premium paid will be reflected within the returns.

The actual value therefore should be obvious when you calculate the returns to capital, which includes the "Goodwill." If the return to capital is poor, then the Goodwill obviously is impaired, and should be written down.

jog on
duc

 

[tech/a]

Ducati

New bike???--916?

 

[prawn_86]

The problem with goodwill is its an intangible and cannot be easily quantified. Its an after the fact figure.

Im sure the amount people are willing to pay now for a brand is much less than 18 months ago, which is personally the reason im not a big fan of including it in valuations, unless it is massively discounted for realism.

 

[skc]

It kind of depends on what sort of valuation analysis you are doing.

Agree with Ducati that for return on capital type analysis, goodwill has to be included. Because it is an actual amount of capital that has been employed to generate the business's cash flow.

If you are looking at net asset backing, then you may decide to put some sort of discount on the goodwill figure if you think they are no longer justified.

In both scenarios your valuation will become more conservative (i.e. lower).

 

[tommymac]

Thanks for your thoughts. You both made good points.

I think in the future I'm going to do two valuations. One with and one without goodwill. At least this will provide a range.