Business Valuations: Assigning Goodwill
I had a wonderful time being a guest speaker on business valuations at the 2017 Minnesota SBA Lenders Conference. The commercial lenders in the room had great questions! One particular question was the process of assigning goodwill.
Per the SBA SOP 50 10 5(I) pg. 114 - "The value of the intangible assets is determined by either the book value as reflected on the business’s balance sheet, a separate appraisal for the particular asset, or the value of the business as identified in the business appraisal minus the sum of the working capital assets and the fixed assets being purchased."
The following will trigger a requirement for a certified third party business appraisal -
If the amount being financed (including any 7(a), 504, seller or other financing) minus the appraised value of real estate and/or equipment is greater than $250,000…OR
If there is a close relationship between buyer and seller (for example, transactions between family members or business partners),….OR
If the lender’s internal policies and procedures require an independent business appraisal from a qualified source.
So the process of assigning goodwill per SBA standards is as follows -
Intangible Assets = Business Value – (working capital + fixed assets)
Final Business Value (per business appraisal): $850,000
Tangible Assets included in the transaction:
Inventory - $50,000
Fixed Assets (Appraised or NBV) - $150,000
$650,000 = $850,000 – ($50,000 + $150,000)
Intangible asset value = $650,000
It is important to understand how the goodwill is determined and assigned in a change of ownership loan. This will help prevent any surprises in the business valuation process. If you have more questions on this or would like to learn more about the services BGH Valuation provides, please email Brandon Hall at email@example.com or call 763-898-8653.