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GOODWILL is that intangible possession which enables a business to continue to earn a profit that is in excess of the normal or basic rate of profit earned by other businesses of similar type. The goodwill of a business may be due to a particularly favorable location, its reputation in the community, or the quality of its employer and employees. The evidence that goodwill exists is the proven ability to earn excess profits. Goodwill is created on the books of a newly purchased company to the extent that the purchase price of the company is greater than the value of its net tangible assets. There are a number of methods for valuing goodwill: a. Simple Capitalization - The net profit of the business is capitalized to determine the total value of the business. The value of all the tangible assets is subtracted from the total value to establish the value of the intangible assets, or goodwill. b. Excess Earnings - the amount of earnings that are in excess of those normally earned by a similar business are capitalized to determine the value of goodwill. c. Income Tax Method - The past five years net income is averaged and a reasonable expected rate of return for tangible assets and salary requirements are subtracted. The resulting value is then capitalized to arrive at the goodwill value. d. Market Value - The price a willing seller would accept and a willing buyer would pay for goodwill. e. Buy /Sell Agreement - The value of goodwill is established by a formula in the buy/ sell agreement. f. Rule of Thumb - Goodwill is worth one years gross income.
A firm that shows increasing goodwill over a multi-year period likely has a sustainable competitive advantage.
BASIS, generally, is that figure or value that is the starting point in computing gain or loss, depreciation, depletion, and amortization of a company. Specifically, it is the financial interest that the Internal Revenue Service attributes to an owner of an investment property for the purpose of determining annual depreciation and gain or loss on the sale of the asset. If a property was acquired by purchase, the owners basis is the cost of the property plus the value of any capital expenditures for improvements to the property, minus any depreciation allowable or actually taken. This new basis is called the ADJUSTED BASIS.
STATEMENT OF AFFAIRS is a specialized form of financial statement setting out the debtors assets and liabilities - secured, preferred and unsecured. This document is usually prepared on short notice and from incomplete records. It is sworn to by an officer of the company and or by the bankrupt where applicable. The trustee often has a different opinion as to the value of the assets and the extent of liabilities included therein. The formalized statement of affairs is sworn under oath by the debtor before a lawyer or designated legal/court entity.
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