• Salvatore Urso

How is Goodwill ("blue sky") Calculated

We shall use the following example to show how goodwill is calculated:

1. Let’s assume a business’ SDE is $100k (i.e., the owner’s benefit).

2. Let’s also assume you hired our firm to determine that a fair multiple for the company is 2.5.

3. Furthermore, let’s say your balance sheet’s net book value of the Fixtures, Furniture & Equipment is $75k.

Thus the operating asset (tangible and intangible) value of this business is $250k (2.5 x $100k). Since the Operating Asset Value includes both Tangible and Intangible Assets, all we need to do is subtract the Tangible Assets, and VOILA!!

M x SDE = Operating Assets = Tangible Assets + Intangible Assets (i.e., Goodwill)

Then we solve the above equation for Goodwill:

Goodwill = M x SDE – Tangible Assets

$175,000 = $250,000 – $75,000

Goodwill (not tangible) is calculated from other variables that are measurable

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