# Goodwill Valuation

## What is Goodwill Valuation?

Goodwill of a company is its long-term intangible asset which physically does not exist; it arises when a purchased company’s acquisition cost is excluded from the fair value of tangible assets of the company. Like goodwill, other types of intangible assets are:
Human resources: the knowledge, experience, and skills of employees,
Intellectual assets: the collection of data, computer programs, and drawings etc.
Intellectual property: legality protected copyrights, patents, and trademarks etc.

## How to value intangible assets like goodwill?

To value intangible assets is not an easy task nor can one get the exact amount, however, two methods; simple estimate and calculated intangible value (CIV) method are used to estimate value which then used in asset-based valuation approach of business valuation.

### Simple estimate

Value of intangible assets = Value of equity – Value of tangible assets
Where value of equity is calculated either by using market capitalization divided by number of shares or using one of earning based methods

### Calculated intangible value (CIV) method

In which, by perpetuity formula, company’s post-tax profit is discounted with the cost of capital. After calculating the value of intangible assets, the value of a company by using asset-based approach will be calculated as under:
Total value of the company = Value of tangible assets + calculated intangible value (CIV)

## Example

Your company reported a profit before tax of \$100 and the value of its tangible assets is \$300. An average return of the industry is 6%. Currently prevailing tax rate is 35% and your company’s cost of capital is 12%. Calculate the value of the company using CIV method.
Current pretax profit = \$30
Less: Industry ROA * Tangible assets (6%*\$300) = \$18
Excess annual return = \$12
Post tax excess return \$12*(1-0.35) = \$7.8
By considering constant perpetuity \$7.8/0.12 = \$65
Therefore,
The value of total company = \$300 + \$65 = \$365

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