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Assigning a value to a business can be a very difficult process. There are strategies and approaches to take in order to get as close to an accurate number as possible, but it is never an exact science. There are many different issues that can arise when conducting a valuation because many decisions are up to the specific financial analyst or appraiser. One issue in particular that can arise no matter how large or small the subject company, is assigning value to goodwill.
Goodwill is defined as “that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified (Hitchner, 2017).” The very second word in the definition, “intangible”, should automatically reveal that giving this value will not be an easy feat. Assigning value to any form of an intangible is already a difficult process because these are factors that cannot be purchased or sold directly, so they do not come with a given monetary amount. Not only is goodwill an intangible, but it’s an intangible that is based around customers’ opinions and loyalty—even more variable. While it is difficult to value, it can oftentimes be the most essential item to value for a company’s worth. In fact, Hitchner (2017) writes “Goodwill may be the primary intangible asset found in professional practices, but the definition of goodwill differs based on the purpose of the valuation.” It is the duty of the valuator to determine which definition of goodwill should be utilized in the given case, and then to accurately estimate the amount.
As mentioned, goodwill is an asset based on the company’s image, reputation, or overall branding. A prevalent company that has experienced this issue of goodwill when dealing with its own valuation is Apple. According to InterBrand’s list of “Best Global Brands” Apple is ranked first, with its brand alone being worth just shy of $19 billion. In a Forbes interview, a Marketocracy Master named David Canaan revealed that because that dollar amount the brand is worth is not reported on any financial statements, the company of Apple overall is undervalued (Kam, 2015). The Apple brand is part of its goodwill. Many customers worldwide will be much more inclined to buy pieces of technology from Apple, just because of the name on the package. However most companies, including Apple, have had to work for their esteemed reputation by developing quality products and customer service. This work and effort that goes into creating high goodwill should be factored into the overall value of the company, but it is not always, or it is but not as accurately as it could be.
Sometimes the best way to approach these cases where estimating a value is filled with issues and problems can be to consult other experts. The Bible even directs us that “two are better than one, because they have a good return for their labor.” When another person is available, receiving wisdom and advice can almost always help reach the best decision.
Best Brands. (n.d.). Retrieved from https://www.interbrand.com/best-brands/best-global-brands/2014/ranking/apple/
Hitchner, J. (2017). Financial valuation: Applications and models (4th ed.). Hoboken, NJ: Wiley
Kam, K. (2015, March 02). Apple’s $119 Billion Asset Hidden In Plain Sight. Retrieved from https://www.forbes.com/sites/kenkam/2015/02/13/apples-119-billion-asset-hidden-in-plain-sight/#132468d66349
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