Points to consider when valuing goodwill 06/01/2022
Valuing goodwill is a complex process and there are many different methods which can be used and that vary from industry to industry. Goodwill is a way of placing a monetary value on the business's reputation and customer relationships. Or as HMRC say in their guidance, in accounting terms, purchased goodwill is the balancing figure between the purchase price of a business and the net value of the assets acquired.
HMRC’s approach to valuation of goodwill suggests that there should be no expectation of a synergy-based value on an open market value basis unless synergy in a particular market is common place.
HMRC’s manuals state that when valuing the goodwill of a business the valuer should have regard to the following:
the full sale and purchase documentation relating to the transfer of both tangible and intangible assets
the valuation approach used – e.g., capitalisation of profits, super profits or a trade specific method
the activities of the business and role of the owners within it
the financial statements/accounts (including the detailed trading and profit and loss account) for the 3 years before valuation
any other relevant financial information
appropriate yield and multiples of comparable companies and sectors
the commercial and economic background at valuation date
how the personal goodwill of the owner has been reflected in the valuation
any other relevant factors.
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