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There are numerous reasons why valuation analysts may be asked to value corporate (also called "institutional") goodwill within a bankruptcy context, including solvency issues (preference actions and fraudulent conveyance claims), valuation of debtor business spin-ofF opportunities, taxation matters (forgiveness of cancellation of debt income due to insolvency), fresh-start accounting and reorganization plan issues (going-concem value vs. liquidation value analyses). This article summarizes the generally accepted cost-approach, market-approach and income-approach methods used to value business goodwill within a bankruptcy context.
Cost-Approach Method
Using the cost-approach method, analysts estimate the amount of current cost that would be required to recreate the debtor goodwill components. The cost approach typically involves a component restoration method.
The first procedure in this method is to list all of the individual components of the entity 's goodwill. The second procedure is to estimate the current cost required to replace each component, which is based on the concept of goodwill as the intangible value of all entity assets in place and ready to use.
One procedure in the restoration method is the analysis of forgone income (considered an "opportunity cost" in the cost approach) during the time period required to assemble all of the entity's tangible and identifiable intangible assets. Let's consider the restoration method to value the goodwill of a debtor mining company and assume that it would take two years to assemble all of the debtor's tangible and intangible assets. The debtor's tangible assets include land and buildings, as well as mining equipment, transportation equipment and mining office equipment. The debtor's intangible assets include operating licenses and permits, computer software, operating manuals and procedures, customer relationships, supplier relationships, and a trained and assembled workforce. This two-year time frame represents the total elapsed time that would be required for the assembled assets to reach the same level of utility, functionality, capacity and income generation as they exist in the actual entity.
This hypothetical asset-restoration process includes the following procedures: (1) the purchase and installation of all equipment; (2) the construction or purchase of al l real estate; (3) the selecti on of suppliers; (4) the creation of a distribution system; (5) the hiring and training of employees; (6) the building of a level of consumer recognition and confidence; and (7) the...