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