Valuations are dependent upon a number of subjective assumptions. One of the main assumptions involves the level of expected future profitability. It is common to see as a basis for future earnings the average of the previous three years. Whilst…
The Future Maintainable Earnings (FME) methodology is the most common method of valuing profitable businesses in Australia. The future maintainable earnings methodology is a derivation or simplification of the Discounted Cash Flow (DCF) method. Whilst the discounted cash flow methodology is…
As forensic accountants, we often see the results of poor partnerships, ones that aren’t planned properly and that end in tears and litigation. Many people will say “don’t go into business with friends, it will just end in tears” but…
We were recently engaged by the liquidators of a security company to determine the value of goodwill arising from the transfer of the business to a phoenix company.
We use Google and the internet as a valuable research tool in almost all our forensic accounting litigation matters. The information available enables us to check the stories of both the plaintiff and defendant against other sources of information.
Financial Statements tell a story
As forensic accountants, one of the first places we examine is the financial statements and income tax returns. To us they tell a story. The financial statements are a record of all the transactions of the business. We examine the trends and ratios of a business –
- Are they consistent with a business of this type?
- Are they consistent with the alleged activities and events of the parties?
- Is there cash not being declared?
- How is the business financed?
- Is the growth or decline of the business consistent with other ratios and transactions in the business?
Use of the Internet as a Research Tool.
Once we have examined the alleged facts and the financial statements, we look to the internet to provide us with further confirmation of the facts and financial statements. The following is available on the internet:
A simple google search of the individuals and the companies involved. We have found the following from a simple searches that only take a few minutes:
Goodwill is an intangible asset derived from other assets of the business. Its existence depends upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of the business.
The High Court of Australia has provided an extensive discussion of goodwill in Commissioner of Taxation v Murry  HCA 42
Goodwill is a valid inclusion in a business valuation to the extent it possesses the following attributes:
- goodwill must be of an enduring nature;
- goodwill is attributable to cash flows expected from future business activity; and
- goodwill must have commercial value (i.e., must be transferable to a third party).
Goodwill by its very nature cannot exist independently of the business which created and maintains it.
“goodwill is not something which can be conveyed or held in gross: it is something which attaches to a business. It cannot be dealt with separately from the business with which it is associated”. Barwick CJ in Geraghty v. Minter HCA 42 at 181
The value of goodwill is tied to the fortunes of the business in terms of its profitability and cashflow and the value of the net tangible assets utilized in the business. The value of goodwill will therefore fluctuate with the performance of the business.
We have often had to address the issue of minority interests when valuing businesses in litigation matters and business restructuring. A minority interest is one where the interest does not have control of the entity being valued, i.e. the shareholding is less than 50%.