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Goodwill Valuation Methods (Average Profit, Weighted Average Profit, Capitalization & Super profit) - YouTube
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hello everyone hi welcome to the channel
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clicking the bell icon firstly we have a
topic that is good well valuation we'll
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try and understand how good will
valuation is done in the company's
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financial statement make see in this
tutorial ok you know how to value curve
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in which has no market scale there's no
market spin for this and it is available
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to measure it so it differs from
business to business and region to the
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regions in this regard all 4 methods
that can be used for good evaluations
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we'll start with the first one it says
the purchase of the average profit
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method this is the first feather so
under this but the goodwill valuation
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method the average that is the mean and
the median profit last few years is
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multiplied by certain number of years to
calculate the value of the goodwill so
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the formula simply is goodwill is equal
to the average profit in 2 years of
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purchase this is going to be the formula
now the average profit over here will be
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is equal to your total profit of all or
agreed years divided by number of years
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okay I'll take an example over here let's
X & Company do you want to
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sell the business to ABC company ok
31st December 2016 the profit of the
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business something are as follow 2011 12
13 they have 13 data here then they have
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2014 2015 and 2016
ok so let me write some numbers here $100
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$120 everything is in terms of million $90
$150, $200 and $220
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so over here this one 20 includes one
time profit of $5 million which is not
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expected to hopefully is not expected in
the future and in 90 million includes
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extraordinary losses of $10 million which
is not expected to be in future so here
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ABC company proprietor Mr. A is
currently employed at let's say 1
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million and that the business of X and
company which is currently managed by
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this already employed X is at let's say
0.5 million so in this particular
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scenario ABC decides to replace the
manager and decided to be managed by mr.
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A so both companies are very to value
the goodwill on the basis of 4 years of
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purchase of average profit of last 6
years so will not on the profit here and
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let's put down some profit details here
in profit 2011 it's going to be directly
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$100 million there's not going to be no
change in 2012 it's again going to be
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120 there's going to be no change unless
one-time profit of 5 million over here
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so we will write negative so our final
amount is going to be what 120 Plus this
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5 that's 115 let me get let me get this
kind of numbers out so that you know
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it's easy for our calculation 100 for
2013 we have to again work on the
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numbers that is 90 million plus the
extraordinary item so it's going to be
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90 plus 10 that's 100 million and you
know profit of 2014 is going to remain
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the same 150 then 200 and last is 220
right so if we sum the whole thing up it
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comes down to 785 million and the
average of this divided by 6 this is
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going to be average right and we have to
add manager's salary which is 0.5
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million we need to deduct mr. a salary
that was 1 million over here you can see
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million down here so the expected
average net profit MP is going to be
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1:30 we need to add this less one so
that's 130.3 and
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because it is 4 times so into 4
that gives us 521 this was the first
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method let me get down to the second
method second is the purchase of the
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weighted average profit that is the
weighted average profit method so this
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goodwill valuation matter is simply an
extension of the the first method which
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we understood where instead of simple
average we use the weighted average and
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the matter is used when the trend of the
profit is rising so let us use the same
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example to understand the method all the
numbers are going to remain the same $100
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$120 you start with $100 we here it was
$100 we need to pick it up to 29 so
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now everything is change it's just that
we forgot to add 100 so $100, $115
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this is $100 $150 $200 and $220 will remain the same there's going to be no change
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right everything is going to remain the
same that is 885 million and the
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weighted average profit will be calculated
if it's something like this this 100
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will be multiplied with $1 and $115 will be
multiplied with 1 + 100 will be
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multiplied with 2 150 will be multiplied
with 2 200 will be multiplied with 3 and
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220 will be multiplied with 3 divided by
1+1+2+2+3+3 so
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net amount that we are going to get is
164 closely $164 million right and
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if you put rest of the numbers in the
similar fashion just the change is going
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to be over here that is the average part
885 this was the second method let me
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come down to the third method that is
the capitalisation method it's called
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the cap method in this method the
goodwill is calculated by ascertaining
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the difference between the capitalize
the expected average average profit or
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the average net profit using the normal
rate of return and the net angel assets
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so over here the goodwill is equal to
your capitalization of the average net
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profit that is NP-NTA net tangible
assets and the last one is the super
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profit
good will method good will valuation
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method now under this good will method
super profit is calculated you know to
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determine the value of the goodwill and
super profit is the excess profit earned
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by the company compared to its PR in the
industry so goodwill here is going to be
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is equal to your super profit into
number of years of purchase okay so
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that's gonna be the thing
and again if you for this you know what
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you have to do just the super profit you
know you have to take down all the
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profit numbers and we need to get the
number in put it there is market rate
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risk free rate you multiply with that
you come down average profit and you
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apply your normal rate to find out the
super profit and finally multiply with e
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average number of years to get the
goodwill answer well there are some of
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the top things that you should know
about the goodwill valuation see 1 or
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2 year profit is taken for goodwill
valuation okay
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and if retiring chairman of the business
is the main source of the success of the
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business generally there are almost
3 to 5 years of purchases usually
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been taken a large number of years you
know may be taken if the super profit is
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is basically too large or business is
highly profitable third you know
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sometimes you know goodwill also
increases you know if there are many
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parties that are putting into the
business and seller wants to increase
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the fourth you know sometimes a business
may be doing losses even the goodwill
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even then they would will maybe paid if
the future prospects of the business are
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very high fifth you know goodwill
valuation is also dependent on the what
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we call as synergies in acquiring the
company gets due to the merger and not
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solely depends upon the Profit and
sometimes you know goodwill valuation
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also depends on the technology R&D and
company possesses on specific set of
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customers or company me have a specific
sectors accompany may be the operating in so
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that's it for this particular topic if
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