7/27/2019 Equicapita - What is Goodwill

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What Is Goodwill? Doesnt Every Business Have It?

What Is Goodwill?Doesnt Every Business Have It?

One o the biggest misconceptions about goodwill is that every business owner thinks his or her businesshas enormous goodwill; meaning they typically think that their business is worth a great deal more than itis. Business owners oten have the idea that since the business has been around or decades that there isgoodwill. The term goodwill is also thrown around in situations where it is really not applicable. The technicaldefnition o goodwill is the value of a business attributable to the excess earnings that a business generatesover and above that which would be expected to be generated on the net equity in the business.

The table below hypothetically illustrates how goodwill can be determined using Zenith Manuacturing as an

example. For simplicity, we will group all intangible assets together with goodwill to determine the collectivevalue or all intangible assets and reer to it as goodwill. For illustrative purposes, we have used the excessearnings model, whereby an investor or business owner would expect to earn a risk adjusted rate o returnon the tangible equity in the business o say 3 times the risk ree bond rate, or 13%. This would equateearnings o approximately $2.3 million. The remaining earnings would be attributable to goodwill, meaningthe things that the business does dierently than its competitors that translate into higher returns or theshareholders or hidden assets the business has that contributes to higher earnings. To determine the valueo the goodwill one has to look at the expected rate o return an owner or investor would expect to earn,consistently, on the group o intangible assets i one were to own the business. In this example we have usedthree times the rate expected on the tangible net worth or 39%. The reason the expected rate o return isso much higher on intangibles is that there is nothing to all back on or to recover i those earnings start todecline or disappear, unlike on tangible assets that can always be sold or auctioned.

Tangible Net Worth a 3,000,000

Expected Return on Tangible Net Worth b 13.00%

(3 times long bond rate)

Profit Attributable To Tangible Net Worth a*b=c 390,000

Maintainable Pre-Tax Profit d 1,200,000

Less: Profit Attributable to Net Worth c (390,000)

Profit Attributable to Goodwill (& other intanbibles) d-c=e 810,000

Expected Rate of Return on Goodwill f 39.00%

3.0 times rate on TNW

Value of Goodwill e/f=g 2,076,923

Add: TNW a 3,000,000

Implied Value of Business g+a=v 5,076,923

Expected Multiple of EBITDA 4.23

Note: Maintainable EBITDA u 1,250,000

Zenith Manufacturing

EXCESS EARNINGS VALUATION INDICATOR

7/27/2019 Equicapita - What is Goodwill

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What Is Goodwill? Doesnt Every Business Have It?

ABOUT EQUICAPITA

Equicapita is a private equity und that acquires established, private, small and medium sizedenterprises (SMEs) located primarily in Western Canada. Equicapitas investment drivers are toacquire operating companies at attractive valuations, with a history o generating sustainable cashow and proven management teams. Equicapita believes that there is:

- a generational opportunity to acquire baby boomer SMEs; and- a unding gap in the $2 to $20 million enterprise value range.

The retirement o baby boomer business owners has been described as triggering one o thebiggest transers o corporate assets on record in Canada. This creates an environment with anabundance o opportunities to acquire SMEs with long-term operating histories, at attractive cashow multiples. Equicapita provides investors with access to this alternative asset class via anefcient RRSP eligible structure.

DISCLAIMER

The inormation, opinions, estimates, projections and other materials contained herein are provided as o thedate hereo and are subject to change without notice. Some o the inormation, opinions, estimates, projectionsand other materials contained herein have been obtained rom numerous sources and Equicapita and itsafliates make every eort to ensure that the contents hereo have been compiled or derived rom sourcesbelieved to be reliable and to contain inormation and opinions which are accurate and complete. However,neither Equicapita nor its afliates have independently verifed or make any representation or warranty, expressor implied, in respect thereo, take no responsibility or any errors and omissions which maybe contained hereinor accept any liability whatsoever or any loss arising rom any use o or reliance on the inormation, opinions,estimates, projections and other materials contained herein whether relied upon by the recipient or user orany other third party (including, without limitation, any customer o the recipient or user). Inormation may be

available to Equicapita and/or its afliates that is not reected herein. The inormation, opinions, estimates,projections and other materials contained herein are not to be construed as an oer to sell, a solicitation oror an oer to buy, any products or services reerenced herein (including, without limitation, any commodities,securities or other fnancial instruments), nor shall such inormation, opinions, estimates, projections and othermaterials be considered as investment advice or as a recommendation to enter into any transaction. Additional

inormation is available by contacting Equicapita or its relevant afliate directly.