The Goodwill Problem

Everyone loves to hate goodwill. It’s this amorphous, misunderstood number that sits on many companies’ balance sheets and causes headaches year after year when it has to be adjusted.  People assume that  represents an over-payment by the acquirer. And accountants look at you with a straight face and say that the entire value could go away in a moment.

Goodwill is created when a company buys another company and has to bring the acquired company into its accounting. There isn’t a lot of good data about this but there is one great study from a few years ago from Ernst & Young that tells us that the average deal is 47% goodwill. The rest of the deal is booked as 23% named intangibles and 30% tangible assets. The total intangibles are thus 70%.

Believe it or not, that 70% intangible figure was less than the 80% average intangible value in public companies in that same time. So, rather than having some wildly optimistic value that it is often painted to be, the average acquisition is in line with (or more conservative than) prevailing corporate valuations. Read more

Business Valuations and the Intangible Information Gap

I was recently sent a copy of a new Statement on Management Accounting about Business Valuation (free but registration required) from the Institute of Management Accountants.

It’s a great overview of the process used to value businesses. None of the information in the paper was a surprise to me. I learned the basics of this process years ago when I was a high-risk lender.

But when I read the paper with my intangible capital hat on, I was struck by how much the accounting challenges of intangibles are limiting and, perhaps, distorting the work of valuation professionals. Read more

Goodwill is a Metric of the Failure of the Accounting Model

At least once a week, I see articles or blog posts bemoaning goodwill. One of the latest was an article in Business Week entitled Magic Tricks on the Corporate Books. This article is typical in its interpretation that goodwill represents funny money. It is often also assumed that management teams are playing games with goodwill. While this may sometimes be the case, goodwill usually represents actual, identifiable value. The problem is that no one really knows when and where this value exists. The accountants could produce data but they don’t. Read more

Lost Intangible Value in M&A

Here’s a question from Richard E. on SlideShare about my recent presentation on Intangible Asset Performance and Financial Results.

Richard E: From your experience when you have visited organisations and they value Goodwill. Can you relate intangible elements that are common across various companies? Same too if an organisation has Intellectual Property and then a merger occurs I suggest for the new combined organisation a loss occurs in respect of the intangibles capital. Perhaps in such instances there may be merit for the lessons learnt of optimizing intangibles before and after a merger to mitigate the potential loss. It’s just an idea, hope it appeals

Here’s my response: Read more