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Goodwill Impairment

See Also:
Goodwill Accounting Term
Fair Market Value
Asset Market Value vs Asset Book Value
Intangible Assets

Goodwill Impairment Definition

Goodwill impairment is goodwill that is now lower in value than at the time of purchase. Goodwill is an intangible asset that sellers are willing to pay for; brand, reputation, a large customer base, strong customer service, and important patents all increase a company’s goodwill. Many contrary factors contribute to impairment of goodwill such as negative publicity from high-ranking company officials, unpopular changes in product line, or a decrease in customer loyalty or brand recognition.

How to Calculate Goodwill Impairment

Goodwill impairment occurs when the goodwill value exceeds the fair value (the estimated value of a company’s assets and liabilities).

Goodwill Impairment Example

Let’s say there is a athletic clothing company called Freeform. Freeform has $20,000,000 in annual sales and a reported Goodwill value of $10,000,000 due to an exceptional product, consistent customer service, and a loyal fan base. The following year a larger athletic company called AltaCorp purchases Freeform for $30,000,000 (combining the sales and Goodwill values).

Unfortunately, after the purchase is complete, sales fall 50% the consecutive year. AltaCorp’s CEO was removed for disparaging comments made towards his female customers. Furthermore, Adidas unfolds a new campaign targeting young women and gains a cult following that competes with Freeform’s largest customer base. Because of the drop in sales and the AltaCorp’s reputation, as well as the increase of competition in the marketplace, Freeform’s fair market value drops to $15,000,000. Now, the company is worth less than AltaCorp paid for it. So the Goodwill must be reduced, which reduces the overall Total Assets. This is a significant hit to AltaCorp as Goodwill can represent a large portion of the company’s net worth.

(Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.)

Goodwill Impairment Analysis

It is important to note that Goodwill Impairment is relative and can be difficult to calculate; in most cases, it’s in the eye of the buyer. Test Goodwill annually against the fair value to manage a buyer or seller’s expectations if the company is undergoing business valuation.

Goodwill impairment gained wider attention in the 21st century after many companies discovered they had unrealistically increased their goodwill. Thus creating an inaccurate valuation of their company. As a result, stricter accounting standards exist to monitor and calculate goodwill.

Goodwill Impairment

Goodwill Impairment

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Fair Market Value

See Also:
Adjusted EBITDA
Asset Market Value vs Asset Book Value
Valuation Methods
Goodwill Impairment

Fair Market Value Definition

The Fair Market Value definition is the price a specific property, asset, or business would be purchased for in a sale. A company’s fair market value should be an accurate appraisal of its worth.

Calculating Fair Market Value is subject to the following conditions:

  1. Prospective buyers and sellers must be knowledgeable about the asset.
  2. Buyers and sellers must not be coerced or strong-armed into selling or purchasing.
  3. All parties must provide a reasonable time frame to complete the transaction.

In other words, an estimate of the amount of money an industry-educated, interested, unpressured buyer would pay to an industry-educated, interested, unpressured seller is the FMV.

How to Determine the Fair Market Value of Your Company

If you are considering selling your business in the future or are just trying to strategically plan for the long-term, then it is crucial that you determine the fair market value of your company. The difference between the fair market value and the purchase price can often be considerable; consequently, many sellers hire professional appraisers for business valuation. This cost can range from a few thousand dollars to $50,000; however, we highly recommend to hire a third party as most owners inaccurately estimate the value of their business, which can lead to disappointed expectations regarding the company’s value or a low sale that leaves hard-earned money on the table.

(Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.)

What Your Appraiser Will Look For

There are many ways to calculate the Fair Market Value of your business; some of the factors that affect a business’s FMV are the business type, the economic conditions at the desired time of sale, the book value, recent income, dividends, goodwill, and recent prices paid for comparable businesses. During an assessment of your company, an appraiser will look for the following items along with many others:

  1. Future Earnings: An appraiser will forecast future earnings over multiple years, factoring in the discount cash flow and discount residual value by comparing your company to similar ones. The discount rate reflects the diminishing value of money year after year. They will also determine the “capitalization of earnings rate,” which indicates the cost of capital and the company’s risk.
  2. Asset Assessment: They will evaluate the Fair Market Value of all the tangible assets of the company, such as inventory or equipment, as well as the intangible assets, such as brand, reputation, and location.
  3. Comparable Sales Figures: They will analyze recent sales of commensurate companies.
  4. A Partial Purchase Discount: If the buyer is purchasing a minority share of the company, then less than 50%, apply a discount since the other party would still control the business.

Conclusion

Appraisers and valuation experts typically use more than one approach when evaluating the FMV of a company. So start identifying the value of your business today by grabbing your business tax returns and general ledger. Before you start the valuation process, download the Top 10 Destroyers of Value to identify any destroyers of value and maximize the potential value.

Fair Market Value, Fair Market Value Definition, Determine the Fair Market Value

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Fair Market Value, Fair Market Value Definition, Determine the Fair Market Value

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Intangible Assets

See Also:
Current Assets
Financial Assets
Fixed Assets
Goodwill Accounting Term
Research and Development

Intangible Assets Definition

An intangible asset is a right or non-physical resource of a company. They are usually developed as a result of an acquisition that has been made, or years of research and development to develop a process or idea.

Intangible Assets Meaning

Intangible asset valuation can be quite difficult. If an acquisition is made of another company the goodwill is the amount by which a company pays a premium over the fair value of the net assets. Intangible assets can also be developed over time through research and development, or may simply contain rights over a certain asset to keep competition. Intangible asset examples include the following:

  • Patents
  • Copyrights
  • Trademarks
  • Licenses
  • Leases
  • Franchises
  • Exploration permits

Most of these items are anti-competitive in nature. In that the developer maintains a right to be a sole provider of an idea or asset. Such is the case for patents or trademarks. These items protect the product for the developer so that they can retrieve the costs to develop the product or idea, thus giving an incentive to develop and expand on ideas. Intangible assets like a copyright protect a developer for life. Copyrights are usually for books to protect a writers creative work and protect his/her original thoughts.

Intangible assets measurement on the financial statements can be difficult at times because sometimes it is hard to see the future benefit from holding an intangible asset. Other times it is difficult to measure an intangible assets total life. Amortize most intangible assets over a certain amount of time. If there is a specified period like for a patent then it is easy to measure the amount of amortization, but if it is a franchise is maybe difficult to measure.

Valuation of Intangible Assets

When you perform a business valuation, it can be tricky to accurately value intangible assets. When a valuation becomes complex, it is standard practice to consult with a valuation firm. If you need help finding one, then we will get you connected with one of our strategic partners for your valuation needs. Fill out the form below to get connected:

We will receive your information between 9-5 Monday through Friday. You can expect to hear back within 24 hours. We only use your information to contact you for the desired help.

Intangible Assets

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Intangible Assets

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Company Valuation Introduction

See Also:
Cost of Capital
Capital Asset Pricing Model
Common Stock
Cash Flow After Tax
Discount Rate
Why Valuation Matters
Valuation Methods
Liquidation Valuation

Company Valuation Introduction

How do you value a company and its equity? How do you calculate a company’s fair value? Have you overvalued or undervalued your company? As we dive into our company valuation introduction, we are going to look at the following are the three approaches to valuation:

DCF Approach

The most fundamental approach is DCF approach, which extends the present value principles to analyze projects to value a company. The following four factors determine the value of a company:

Market Valuation Multiples

Market valuation multiples which include the following:

Comparable Transactions

Comparable transactions approach of valuing a company involves using a price multiple to evaluate whether an asset is relatively fairly valued, or undervalued, or overvalued when looked at the comparable transactions that have taken place in the industry and compared to a benchmark value of the multiple.

Valuation can be difficult if you don’t have much experience. But with our guide, you’ll learn how to value your company AND remove any destroyers that are impacting your company’s value. Download the Top 10 Destroyers of Value to maximize the value of your company.

company valuation introduction

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company valuation introduction

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FASB Eases Mark-To-Market

Today the Financial Accounting Standards Board (FASB) changed FAS 157, providing companies more flexibility in determining the fair value of their investments held. In addition, the FASB also granted companies more flexibility in taking impairment charges on investment losses. The changes will take effect in Q2, though companies will be free to report Q1 under the new rules. Continue reading about how FASB eases mark-to-market.

FASB Eases Mark-To-Market

It will be interesting to follow the impact of these rule changes on those companies most affected by the “toxic assets” on their balance sheet. Will the change enable them to workout their problems or will it mask future poor decision making?

If you are at a stage where you need to improve your financial leadership skills, then click below to learn about our SCFO Lab. The SCFO Lab is the premier financial leadership development platform. It was over 19 Execution Plans, bimonthly office hours, and so much more.

FASB Eases Mark-To-Market

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