Project Report On Goodwill 4f53

PROJECT REPORT ON GOODWILL

SUBMITTED TO :-

SUBMITTED BY:-

Ms.Menka Mehmi

Navdeep

Lect. Of Commerce

B.com 1ST year(2NDsem.) (Deficient) Roll No.10851395832

INDEX

INTRODUCTION OF GOODWILL

The name and fame of an organization can be termed as goodwill. Goodwill is the benefit and merit of good name and reputation. Goodwill refers to a measure of the capacity of a business to earn excess profit. Therefore, goodwill can be defined as an intangible asset of the business. Thus, goodwill may also be defined as "value of the reputation of business". It is a valuable asset if the concern is profitable. It is useless if the concern is a loosing concern. Goodwill can be described as the extra sale able value attached to a prosperous business beyond the intrinsic value of net assets. Thus the existence of goodwill can be felt through extra earning power. Because of such a nature, it seems like a real assets. But since it is invisible such as patents, trademark, copyrights etc. goodwill is termed as intangible assets.

Meaning of Goodwill: Goodwill may be described as the aggregate of those intangible attributes of a business which contributes to its superior earning capacity over a normal return on investment. It may arise from such attributes as favourable locations, the ability and skill of its employees and management, quality of its products and services, customer satisfaction etc.

Definition of Goodwill: According to Lord Elden, “ Goodwill is nothing more than the profitability that the old customer will resort to the old place”.

FEATURES OF GOODWILL

1. Intangible Asset:- . Goodwill is an intangible asset. It is non-visible but it is not a fictitious asset. 2. Non separated:- It cannot be separated from the business and therefore cannot be sold like other identifiable and separable assets, without disposing off the business as a whole. 3. Value of Goodwill:- The value of goodwill has no relation to the amount invested or cost incurred in order to build it.

4. Valuation of Goodwill:- Valuation of goodwill is subjective and is highly dependent on the judgment of the valour. 5. Fluctuation of Goodwill:- Goodwill is subject to fluctuations. The value of goodwill may fluctuate widely according to internal and external factors of business. 6. Nature of business:- A business having stable continuous demand for its products such as consumer goods is able to earn more profits and hence has more goodwill. If the business is risky, profits will be uncertain. The monopoly condition or limited competition enables the enterprise to earn higher profits which leads to higher value of goodwill.

7. Relationships:- It creates good relations with customers, suppliers, labour and government. 8. Capital Required:- If two businesses have same rate of profit, the business which requires lesser amount of capital tends to enjoy more goodwill.

FACTOR AFFACTING GOODWILL

1. Products and services:- It produces good quality and outstanding quality of products and service. 2. Location factors:-If a business is located at a favourable place; it enhances the value of goodwill. 3. Period :- The period for which the business has been in business. 4. Special advantages:-A company that enjoys special advantages such as favourable contracts, assured supply of raw material at low rates, possession of trademarks, patents, copyrights, technical knowhow and research and development, well known collaborators etc. contribute to higher value of goodwill. 5. Nature of Business:-A business having stable continuous demand for its products such as consumer goods is able to earn more profits and hence has more goodwill. If the business is risky, profits will be uncertain. The monopoly condition or limited competition enables the enterprise to earn higher profits which leads to higher value of goodwill. 6. Efficiency of Management:-A firm having efficient management enjoys advantages of high productivity and cost of efficiency. This leads to higher profits which in turn increases the value of goodwill. 7. Capital Required:-If two businesses have same rate of profit, the business which requires lesser amount of capital tends to enjoy more goodwill.

8. Relationships:- It creates good relations with customers, suppliers, labour and government.

ING FOR GOODWILL

The various ways in which goodwill can be ed for are as follows: (a) Carry it as an asset and write it off over a period of years through the profit and loss . (b) Write it off against profits or accumulated reserves immediately. (c) Retain it as an asset with no write-off unless a permanent diminution in value becomes evident. (d) Show it as a deduction from shareholders funds which may be authorized carried forward indefinitely. In this connection, it is important to state that goodwill should be recognized and recorded in business only when some consideration in money or money’s worth has been paid for it.

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Valuation of goodwill may be made due to any one of the following reasons: (a) In case of a Sole-Proprietorship Firm: (i) If the firm is sold to another person; (ii) If it takes any person as a partner; and (iii) If it is converted into a company.

(b) In the case of a Partnership Firm: (i) If any new partner is taken; (ii) If any old partner retires from the firm; (iii) If there is any change in profit-sharing ratio among the partners; (iv) If any partner dies; (v) If different partnership firms are amalgamated; (vi) If any firm is sold; and (vii) If any firm is converted into a company.

(c) In the case of a Company: (i) If the goodwill has already been written-off in the past but value of the same is to be recorded further in the books of s; (ii) If an existing company is being taken with or amalgamated with another existing company; (iii) If the Stock Exchange Quotation of the value of shares of the company is not available in order to compute gift tax, wealth tax etc.; and

(iv) If the shares are valued on the basis of intrinsic values, market value or fair value.

IMPORTANCE OF GOODWILL

IM P O R T A N C E T O B U S IN E S S IM P O R T A N C E T O C U S T O M E R S A) Goodwill is for Business what Reputation is for a Person You can say that goodwill is an emotion that exists within us and when you create an emotional bond with the people, you deal with; you are rewarded with opportunity, business networks, endorsements and trust. Here is a list of points to the importance of business goodwill.  Building goodwill with customers. Goodwill is important to increase your customer base but also retain your old clients. This happens through word-of-mouth publicity and recommendations. Many customers return to you if you’ve provided them good customer service and have established a good relationship with them.  Investors are attracted to businesses that have goodwill. The goodwill of your firm is equivalent to solid cash. It will help you obtain loans from banks with ease knowing that you are a valued customer.  New avenues open up; opportunities are created through business networks if you have longstanding business goodwill.

 When you want to sell your business at any point in time, your reputation and the goodwill of your business will attract many potential buyers. You will be able to sell your business for a good amount.

How to Build Business Goodwill Goodwill is something that cannot be bought but has to be earned; there is no way to earn it overnight. It will take considerable time and effort to develop goodwill in for a business. We have listed some factors that aids in developing goodwill in business.  Maintain the quality of your products or services – that the first impression is the best impression. If your business provides quality products/services right from the beginning, you are taking the steps towards developing goodwill. 

Rapport building and integrity – People will find dealing with your business easier when you take pleasure in servicing them and when you provide business integrity.

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Brand commitment -Your business should be one step ahead of your competitors. A business under the limelight for the right reasons will attract goodwill for itself.

 Service satisfaction – A customer is likely to return to you and also recommend your services/products if he is happy with his experience.  Community service not only helps in developing business good will but also leads to small business longevity - As your business grows, you should focus on investing in community goodwill. Some suggestions could be, making a small donation to community functions or by giving a helping hand to those start-ups of a different industry that are struggling. You can also promote amateur artisans and musicians by holding exhibitions or concerts for them. Local residents would be willing to buy tickets that are fairly priced. You should include other small businesses to help with local events. It will pay-off with long-term sales growth and business referrals. Goodwill is all about the nature of the business and the integrity and ethics with which you conduct your business. The understanding between your customers and you, your employees and you also contribute to the business goodwill. Consider goodwill as an honour that is impossible to imitate.

B) The Importance of Creating Goodwill with Customers Creating goodwill among people is important in almost every area of your life. Spreading goodwill makes people feel good about you, and it encourages them to spread goodwill to others. In business, creating goodwill can help you to build relationships that ensure the long-term success of your business. You can create goodwill in a number of ways, from creating customer appreciation programs to going the extra mile when you are providing a service. In return, your business will reap a number of benefits. Here are just a few ways that creating goodwill with customers can help your business.

1. Encourages Brand Loyalty:- When you feel good about a company, you want to do business with them again and again. Creating goodwill with customers encourages brand loyalty by making them feel good about doing business with you. Not only does it encourage customers to your company the next time they need a product or service that you offer, but it also encourages them to recommend your company to their family and friends, helping you to expand your customer base.

2. Encourages Forgiveness:- Think about how you feel when your neighbour brings you a big tin of cookies at Christmas time. You are probably less likely to be upset when that same neighbour parks in front of your yard or doesn’t bring in their newspaper, letting a pile form in the driveway. The same concept applies to your business. When you create goodwill with your customers — by going the extra mile, by exceeding their expectations, or by showing them personal attention —they are more likely to overlook your mistakes when you make them.

3. Sets You Apart from the Competition:- When customers are having a hard time choosing between companies who have similar products and price points, the goodwill you create can help set you apart from your competition and push them in your favour. Maybe you went the extra mile by tracking down obscure information to answer a question.

4. Improves the Value of Your Business:- Investors understand the importance of goodwill and what it builds with customers. If your company has a positive reputation as a result of the goodwill it has built, it will increase its value. This will help you to attract more investors or secure credit more easily if you are looking to expand your operations, and it will help you to command more in a sale if you choose to sell your business. Building goodwill builds value.

ADJUSTMENT FOR GOODWILL The concept of goodwill can be understood on the basis of its operational significance. Goodwill is what goodwill does. It brings in more customers to a firm, without much persuasion.

Goodwill arises mainly on of: (1) Good reputation of the owners, (2) Established popularity of products, (3) Effectiveness of Advertising, (4) Favourable Locality, (5) Monopoly and (6) Non-availability of similar products etc. In case a firm is not going and is not successful, there will be no value attached to goodwill; if any value appears, then it will be not only intangible but also fictitious. Goodwill arises only if a firm earns extra profits, which is called super profits.

There are two points: (1) When one buys a business, he will be able to get profits in future only and is not concerned with the past profits at all. (2) Goodwill is paid for the ability to earn super profits and not for ordinary profits. Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal profits.

Indications for the Existence of Goodwill: There are a number of contributing factors responsible for the existence of goodwill.

The following are some of the deciding factors in favour of the existence of goodwill: 1. In a manufacturing firm, the quality, standardisation, and price of a product etc. are important factors. 2. In a distribution firm, the and conditions of the credit facility etc. are important. 3. In bank services, the safety of money deposited, liberal policy of lending, prompt services etc. are indicators of goodwill. 4. In hotels, the taste and quality of the food, cleanliness and courteous service etc. are indicators of goodwill. 5. In a firm of Doctors, the diagnostic ability, surgical dexterity is evidence for goodwill. 6. In a firm of Chartered ants, the sharp insight is an indication of goodwill. 7. In a provision store, the courtesy shown to the customers, supply of good quality items at reasonable price etc. are the proof of existence of goodwill. Because of all these special attractions, a firm may attract many customers, in turn more sales, in turn more profits; in turn establish the existence of goodwill. The goodwill is a silent super-salesman and an attractive force by which customers become invitees without persuasion.

ING TREATMENT OF GOODWILL  In case of ission of a new partner.  In case of a death or retirement of a partner.  In case of Reconstitution of Partnership.

(A).IN CASE OF ISSION OF A NEW PARTNER When a new partner enters in partnership firm, the old partner sacrifices his share for him , so it is the duty of new partner to give goodwill in cash or in any other way to old partner . There are following method with this new partner give his share of goodwill to old partners .

1st method Private distribution of goodwill Under this method , new partner gives his share of goodwill to old partners personally .So there is no need to record it to the books of firm . No journal entry will .

2nd method Goodwill is given in cash form by new partner Under this method , old partner bring his share of goodwill in cash form in the firm and it is taken by old partner in their sacrifice ratio . For this following journal entry in the books of firm (1) Cash / Bank (Dr) ................xxxx To Goodwill / .............xxxx

(2) Goodwill (Dr.).................. xxxx ( share of new partner’s goodwill ) To old partner’s capital ..............xxxx ( divide in sacrifice ratio )

3rd method when new partner bring goodwill in cash in business and taken by old partner and then withdraw by old partner Above two entries will as same as in second method but third new entry will Old partner’s capital (Dr.)................ xxxx To cash / bank ...........................xxxx

4th method When new partner do not bring goodwill in cash form If new partner do not bring goodwill in cash in firm , then following entry will for the adjustment of goodwill . New partner’s capital (Dr.).......... xxxx (share of goodwill ) To old partner’s capital .......xxxx (division in sacrifice ratio)

5th method If partial in cash form of goodwill Part of cash goodwill (1) Cash (Dr.).............. xxxxxx To goodwill / .............xxxx

(2) Goodwill (cash goodwill)(Dr.).......... xxxx New partner ( not in cash goodwill)(Dr.)......... xxxx To old partner capital in sacrifice ratio ........xxxxxxx

6th method If goodwill already exits in balance sheet of old partner , then it must be transfer to old partner’s capital in old ratio . Other method is same above from 1 to 5 method . Entry ed for transferring of old goodwill Old partner’s capital (Dr.) ..............xxxxxxx To goodwill ...................xxxxxxx

7th method If new partner brings other asset as goodwill of his share of goodwill . Then following entry will

(1) Asset (Dr) ....................................xxxxxx To goodwill .............................. xxxxxxxx (2) Goodwill (Dr.)............................... xxxxxxxxx To old partner’s capital in sacrifice ratio ........xxxxxxxxxx

(B).IN CASE OF DEATH OR RETIREMENT OF A PARTNER The valuation of goodwill has been discussed in ission of a partner. The same process should be followed here too. But during the time of retirement, the retiring partner has the right to get his share of goodwill of the firm. Therefore, to give effect to the same, the following adjustment must be carried out.

A. Goodwill already appears in the books i. If old value of goodwill is equal to new valuation of goodwill: - Adjustment entry is not needed ii. If the existing value of goodwill is less than the new valuation: Goodwill A/C.........Dr.(excess value) To all partners' capital A/C Note: The excess amount of goodwill is transferred to remaining and outgoing partners according to old profit sharing ratio. iii. If the existing value of goodwill is greater than new valuation: All partners' capital A/C..........Dr.(less value) To Goodwill A/C

B. Goodwill not already appeared in the book i. Goodwill raised at its full value: Goodwill A/C.............Dr. To All partners' capital A/C ii. Goodwill raised at its full value and written off immediately: Goodwill A/C ...........Dr. To all partners' capital A/C (old profit sharing ratio) iii. Goodwill raised at only retired partner's capital and immediately written off: Goodwill A/C............Dr. To retired partner's capital A\C

(C).IN CASE OF RECONSITITUION OF PARTNERSHIP

1. ing Treatments required at the time when Existing Profit

Sharing Ratios changes. Following ing Treatments are required at the time of changing in Existing Profit Sharing Ratios : (i) ing Treatment for Goodwill (In Sacrificing and Gaining Ratio). (ii) ing Treatment for Revaluation of Assets and Liabilities ( In Old Profit Sharing

Ratio)

(iii) ing Treatment for Distribution of Undistributed Profits-Losses and Reserves (In Old Profit Sharing Ratio) (iv) ing Treatment for Adjustment of Capital ( If Capital is changed)

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ing Treatments are required at the time of ission of a New Partner Following ing Treatments are required at the time of ission of a New Partner/Partners : (i)

ing Treatment for Goodwill (In Sacrificing Ratio).

(ii) ing Treatment for Revaluation of Assets and Liabilities ( In Old Profit Sharing Ratio) (iii) ing Treatment for Distribution of Undistributed Profits-Losses and Reserves (In Old Profit Sharing Ratio) (iv) ing Treatment for Adjustment of Capital ( If Capital is changed)

3.ing Treatments are required at the time of Retirement/Death of a Partner Following ing Treatments are required at the time of Retirement/Death

of a

Partner : (A) Calculation of Amount Due : First of all Amount Due will be calculated with the help of the following points to be paid to the Retiring partner or the legal heir/heirs of the deceased partner. (i)

ing Treatment for Goodwill (In Sacrificing Ratio and Gaining Ratio).

(ii) ing Treatment for Revaluation of Assets and Liabilities ( In Old Profit Sharing Ratio) (iii) ing Treatment for Distribution of Undistributed Profits-Losses and Reserves (In Old Profit Sharing Ratio) (iv) ing Treatment for Life Insurance Policies (If taken) (v)

Other ing Treatments : a)

Interest on Capital

b)

Interest on Drawings

c)

Share in Profits (for the current ing period, if retirement/death happens in

mid term) d) Any Remuneration or Commission Amount (B)

Payment of Amount Due :

After calculation of Amount Due, next step will be "the payment of the Amount Due". Payment can be made by any of the following three methods : (i)

Lump-Sum Payment

(ii)

In Instalments

(iii)

By giving Annuity

So we are to take care of the above mentioned ing Treatments in the various cases of Reconstitution of Partnership Firm.

TYPES OF GOODWILL NP

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(а) Purchased Goodwill:Purchased goodwill arises when a business concern is purchased and the purchase consideration paid exceeds the fair value of the separable net assets acquired. The purchased goodwill is shown on the assets side of the Balance sheet. Para 36 of AS-10 ‘ing for fixed assets’ states that only purchased goodwill should be recognized in the books of s.

(b) Non-Purchased Goodwill/Inherent Goodwill:Inherent goodwill is the value of business in excess of the fair value of its separable net assets. It is referred to as internally generated goodwill and it arises over a period of time due to good reputation of a business. The value of goodwill may be positive or negative. Positive goodwill arises when the value of business as a whole is more than the fair value of its net assets. It is negative when the value of the business is less than the value of its net assets.

METHODS OF GOODWILL

MGO oe ot hd ow d i ls l f These methods have been explained as follows:1. Arbitrary Valuation:- value of goodwill, in this case is fixed by mutual agreement between the parties. In some cases, the value may be fixed by an independent person known as Arbitrator. This method can be used only where earning capacity of the firm is exactly known. 2. Average Profits :- Under this method goodwill is calculated on the basis of the average of some agreed number of past years. The average is then multiplied by the agreed number of years. This is the simplest and the most commonly used method of the valuation of goodwill. Goodwill = Average Profits X Number of years of Purchase

Before calculating the average profits the following adjustments should be made in the profits of the firm: a. Any abnormal profits should be deducted from the net profits of that year. b. Any abnormal loss should be added back to the net profits of that year. c. Non operating incomes e.g. income from investments etc should be deducted from the net profits of that year

3. Super profits method:Super Profits are the profits earned above the normal profits. Under this method Goodwill is calculated on the basis of Super Profits i.e. the excess of actual profits over the average profits. For example if the normal rate of return in a particular type of business is 20% and your investment in the business is $1,000,000 then your normal profits should be $ 200,000. But if you earned a net profit of $ 230,000 then this excess of profits earned over the normal profits i.e. $ 230,000 – $ 200,000= Rs.30,000 are your super profits. For calculating Goodwill, Super Profits are multiplied by the agreed number of years of purchase. Steps for calculating Goodwill under this method are given below: i) Normal Profits = Capital Invested X Normal rate of return/100 ii) Super Profits = Actual Profits – Normal Profits iii) Goodwill = Super Profits x No. of years purchased

4.Capitalisation Method: There are two ways of calculating Goodwill under this method: (i) Capitalisation of Average Profits Method

(ii) Capitalisation of Super Profits Method

(i) Capitalisation of Average Profits Method: Under this method we calculate the average profits and then assess the capital needed for earning such average profits on the basis of normal rate of return. Such capital is called capitalised value of average profits. The formula is:Capitalised Value of Average Profits = Average Profits X (100 / Normal Rate of Return) Capital Employed = Assets – Liabilities Goodwill = Capitalised Value of Average Profits – Capital Employed

(ii)Capitalisation of Super Profits: Under this method first of all we calculate the Super Profits and then calculate the capital needed for earning such super profits on the basis of normal rate of return. This Capital is the value of our Goodwill . The formula is:Goodwill = Super Profits X (100/ Normal Rate of Return)

5. Annuity Method:- Under this method, goodwill is calculated by finding the present worth of annual super profits to be earned over an estimated period by discounting at a given rate of interest. The present value factor of annuity for the given number of years and interest rate can be obtained by making a reference to annuity table. Under this method, value of goodwill is calculated by using the following formula: Goodwill =super profits x Annuity factor

6. Hidden Goodwill:- When the value of goodwill is not given in the question, it has to be calculated on the basis of total capital/net worth of the firm and profit sharing ratio. Illustration 8. X and Y are partners with capitals of ₹ 10,000 each. They it Z as a partner for 1/4th share in the profits of the firm.

GOODWILL VALUATION APPROACHS There are several generally accepted methods applicable to the goodwill valuation. After considering the similarities and differences, each method may be categorized into one of the three intangible asset valuation approaches. As stated above, cost approach and market approach valuation methods are less commonly used, and income approach valuation methods are more commonly used in the goodwill analysis. The following discussion summarizes these valuation methods. 

Income Approach:- The Income Approach With regard to goodwill, the income approach methods include the residual from business value method, the capitalized excess earnings method, and the present value of future income method. Each of these valuation methods is based on the concept of goodwill as the present value of future income not associated with the entity’s tangible assets or identifiable intangible assets.

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Cost Approach :- The financial adviser estimates the amount of current cost required to recreate the goodwill component elements. The cost approach typically involves a component restoration method. The first procedure in the component restoration method is to list all of the individual components of the entity’s goodwill. The second procedure is to estimate the amount of current cost required to replace each goodwill component. This procedure is based on the concept of goodwill as represented by the intangible value of all entity assets in place and ready to use. One procedure in the restoration method is the analysis of forgone income (considered an opportunity cost in the cost approach) during the time period required to assemble all of the entity’s tangible assets and identifiable intangible assets.

 Market approach:- There are two common market approach methods related to goodwill. The first method estimates the value of goodwill as the residual from an actual business acquisition price. This method is

called the residual from purchase price method. The second method estimates the value of goodwill based on an analysis of guideline sale transactions. This method is called the sales comparison method. Goodwill is rarely sold separately from any other assets (either tangible assets or intangible assets) of a going-concern business

COMPONENTS OF GOODWILL 1. Excess of the fair values over the book values of the acquirer’s recognized assets. In a business acquisition, as assets acquired are measured at fair value, these excesses should not exist. Subsequent to the acquisition, the acquirer’s goodwill could include such excesses where assets are measured at cost.

2. Fair values of other net assets not recognized by the acquire. The assets of concern here are those tangible assets which are incapable of reliable measurement by the acquire, and nonphysical assets that do not meet the identifiability criteria for intangible assets.

3. Fair value of the ‘going concern’ element of the acquirer’s existing business. This represents the ability of the acquire to earn a higher return on an assembled collection of net assets than would be expected from those net assets operating separately. This reflects synergies of the assets, as well as factors relating to market imperfections such as an entity’s ability to earn a monopoly profit, or where there are barriers to competitors entering a particular market. 4. Fair value from combining the acquirer’s and acquirer’s businesses and

net assets. This stems from the synergies that result from the combination, the value of which is unique to each combination. 5. Overvaluation of the consideration paid by the acquirer. This relates to errors in valuing the consideration paid by the acquirer, and may arise particularly where shares are issued as consideration with differences in prices for small parcels of shares as opposed to controlling parcels of shares. There could also be overvaluation of the fair values of the assets acquired. This component could then relate to all errors in measuring the fair values in the business combination. 6. Overpayment or underpayment by the acquirer. This may occur if the price is driven up in the course of bidding; conversely, goodwill could be understated if the acquirer’s net assets were obtained through a distress or fire sale.

GOODWILL DATA SOURCE Goodwill data sources can be either internal or external to the entity. Internal data sources typically relate to documentation regarding the entity’s historical or prospective results of operations. External data sources typically relate to empirical pricing data with regard to the goodwill of guideline business or professional practice sale transactions

Internal Data Sources :1. The existence of identified tangible assets and intangible assets, including a detailed listing of working capital s, real estate, tangible personal property, and identifiable intangible assets (including intellectual property) 2. The valuation of tangible assets and identifiable intangible assets, including recent appraisals of any asset category 3. The historical results of business operations, including historical income statement extern balance sheets, cash flow statements, and capital statements 4. The prospective results of business operations, including current budgets, plans, forecasts, and projections prepared for any purpose Information from these internal data sources can be used in the goodwill valuation.

External Data Source :For certain industries (principally professional practices), there are publications, periodicals, and online data sources that report on the goodwill components of actual business sale transactions. Some of these data sources are listed in the next section 3. Bank M&A Weekly (Charlottesville, VA: SNL Financial, weekly). Bank M&A Weekly is the only source dedicated to comprehensive coverage of bank and thrift industry consolidation, including branch deals and other asset transactions. Delivered via e-mail every week, each issue includes key deal ratios, buyer and target financials, industry trends, and feature stories 4. The Lawyer’s Competitive Edge: The Journal of Law Office Economics and Management (Eagan, MN: West, monthly). Practical management information to minimize falling profits, client loss, and employee dissatisfaction.

5. Merger & Acquisition Survey of Architecture, Engineering, Planning & Environmental Consulting Firms (Natick, MA: Zweig White & Associates, annual).

REASONS TO VALUE GOODWILL 1. Economic damage analyses. When a business has suffered a breach of contract or a tort (such as an infringement, breach of a fiduciary duty, or interference with business opportunity), one measure of the damages suffered is the reduction in the value of the entity’s goodwill due to the wrongful action. 2. Business or professional practice merger. When two businesses merge, the equity of the merged entity typically is to be allocated to the merger partners. One common way to allocate equity in the merged entity is in proportion to the relative value of the assets contributed, including the contributed goodwill . 3. Business or professional practice separation . When a business separates, the assets of the consolidated business typically have to be allocated to the individual business owners. One common way to allocate the assets to the separating business partners is in proportion to the relative value of the assets controlled by or developed by each partner, including the goodwill of each business partner. 4. Solvency test. The solvency of a business entity is an issue with regard to lender’s fraudulent conveyance concerns during a financing transaction or a financial restructuring. One of the individual tests to determine if a business entity is solvent is: Does the fair value of the entity’s assets exceed the value of the entity’s liabilities (after consideration of the financing transaction). 5. Insolvency test. The degree of insolvency of a business entity may have federal income tax consequences if debt is forgiven (in whole or in part) during a refinancing transaction or financial restructuring. One of the specific tests to determine if a business entity is insolvent for federal income tax purposes is: Is

the fair market value of the entity’s assets less than the value of the entity’s liabilities.

6. Business enterprise valuation. The identification and quantification of goodwill is one procedure of the asset-based approach to business valuation. An asset-based approach is often used in the valuation of an industrial or commercial company or professional service business. 7. Deprivation analysis. The goodwill valuation may be one component in the damages analysis associated with a business that is subject to a condemnation, expropriation, or eminent domain action. Financial advisers sometimes only consider the value of the entity’s real estate and tangible personal property subject to the condemnation or other “taking.” 8. Intercompany transfer price. When intangible assets are transferred between related entities (for example, between a parent corporation and a less than wholly owned subsidiary), an arm’s-length price should be estimated for the intercompany transfer of the assets. 9. Ownership allocation litigation. Several forms of litigation involve the allocation of direct or indirect ownership interests in a business entity. 10. Intercompany transfer price. When intangible assets are transferred between related entities (for example, between a parent corporation and a less than wholly owned subsidiary), an arm’s-length price should be estimated for the intercompany transfer of the assets. Such an intercompany transfer may affect the profitability and return on investment of, say, two subsidiaries—one that is wholly owned and one that has a 10 percent minority interest owner.