Over-profit procedure

With the aid of the excess profit method, the goodwill can be calculated using the excess profit generated by the company. It is the profit that is achieved over and above the normal rate of return on the asset value. A distinction must be made between:

Excess profit compensation

The method of excess profit compensation, which assumes that the seller of a company is not just the Reproduction value is entitled, but also an amount that compensates for the renunciation of the excess profits of the coming years. After a few years, the excess profits can be traced back to the new owner (original Goodwill) or gradually disappear due to competitive pressure.

The company value results from:

U = RW + m (G - i * RW)

U = company value (€)
RW = (partial) reproduction value (€)
G = average profit (€ / year)
i = normal rate of interest 100 (%)
m = factor of the assumed volatility of the goodwill (it is usually between 3 and 6)

Excess profit capitalization

With the method of excess profit capitalization, it is assumed that profits exceeding the normal interest rate of the reproduction value are particularly risky and the excess profit must therefore be capitalized with a higher than the normal interest rate.

The present value determined in this way is the goodwill as company value:

U = RW + G - i * RW / h

G = annual profit
i = discount rate
h = interest rate for excess profits

 

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