Under the accounting standards published by the Financial Accounting Standards Board (FASB) two deal with the way business goodwill is handled: SFAS 141 and SFAS 142.
Business goodwill is put on the company’s books if management acquires another firm. Under the SFAS 141 and 142 goodwill is tested each year for impairment. This impairment occurs when the fair value of the business overall is less than the sum of the fair values of all its assets.
Let’s say that a company carries a book value of $1,000,000 in assets. This includes $100,000 in business goodwill from an earlier acquisition. The goodwill is unchanged until there is an impairment.
If the company’s value this year is $1,500,000; it is clearly above the total asset value and there is no goodwill impairment.
But if the market conditions change, the value of the business may drop down to, say, $900,000. This just covers the asset value. To bring the value of the company in line with its assets it needs to take a write down of business goodwill of $100,000. It is charged to the business earnings in the year and could easily wipe out the entire profit.
This is the case even though this goodwill impairment is a non-cash charge that has nothing to do with how well the company operations did in the year. Because the profits may not look good, the company’s perceived value may go down even more!
When discussing the company’s valuation with potential investors it would be wise to point out that business goodwill impairment may be responsible for a slide in profits. A closer look at business operations may reveal that the company’s earning power is unaffected.
You may be aware that market comparisons are a common tool to value private businesses. Not surprisingly, this methodology gets a full coverage in ValuAdder business valuation software.
In fact, the ValuAdder Market Comps tools use a combination of the industry-standard Comparative Transaction and Guideline Public Company methods under the market approach. This gives you an increased coverage across a wide range of industry sectors.
For industries where private companies abound the direct review of comparable sale transactions is the typical method. On the other hand, in some sectors where companies grow rapidly with a goal of going public, comparison to small cap publicly traded firms is a solid strategy for small professionally managed private companies. Typically, you would adjust the numbers for lack of private firm marketability when making such public to private company comparisons.
There are a number of data sources to choose from. One of the most reliable and best known is the EDGAR database maintained by the US Securities and Exchange Commission (SEC). You can access EDGAR freely online.
The current Market Comps coverage in ValuAdder features 425 distinct industry sectors arranged by the SIC and NAICS codes. The sectors include:
- business and personal services
- food and drink industry
- wholesale and distribution
- health care
- financial services
- energy sector
- and many others
To give you the broadest coverage possible, the ValuAdder valuation multiples are designed for valuation of private small to mid-market companies with market capitalization under about $500M. This includes the vast majority of private businesses and professional practices.
When you use the ValuAdder Market Comps tool, your valuation results are reported in the standard Low – Median – Average – High format. This reflects the statistical nature of the market approach – you compare your company to others that are similar but not identical to your business.
See how to value a business using valuation multiples gathered from the market involving comparable business sales.
See Example »