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Case Study 1: Determining Goodwill and Other Intangible Assets 83Recruiting costs are incurred to obtain a new employee, who may be either untrainedor previously trained. The major componentsof recruiting costs are employment agencies,advertising, and other recruitment-related expense. In order to hire most professionallevelemployees with similar skill sets, an employment agency may be used, which wouldtypically charge a fee based on the starting salary. For the level of employees employed bythe Company, the average recruiting cost is 27.5% of starting salary.Training costs are incurred to train employees and bring them to the level ofperformance normally expected from an individual in a given position. The trainingcosts of an employee reflect the amount of time inefficiently used by a new employee(inefficiency training cost) and the time inefficiently used by a training supervisor(direct training cost) during the first few months on the job. Training and supervisorycosts were estimated by multiplying the fully burdened weekly salary of the employeeby the average amount of inefficiency incurred during the training period. Theinefficiency estimate used here for training and supervisory costs is 33.3%, orone-third of the time. This can vary depending on the business. Interview costsare estimated based on average hours per employee class, as follows:ClassHours1 52 103 20The average fully burdened interview rate is $75.00 per hour.The summation of the hiring and training costs results in the total cost to replacethe assembled workforce, as shown in Exhibit 3.7. Based on the cost approach, andafter adjusting for taxes at 40% and adding the amortization benefit, the fair value ofthe assembled workforce is estimated to be approximately $1,790,000 (rounded) as ofDecember 31, 2006. No obsolescence is recognized for this asset in this example.SFAS No. 141 specifically prohibits the recognition of assembled workforce as anintangible asset apart from goodwill. 13 However, in the application of the multiperiodexcess earnings method, which is used to value the Company’s technology, inprocessresearch and development, and customer base, contributory charges aretaken on the fair values of all of the contributory assets acquired in the acquisition.The value of the assembled workforce is calculated so that a contributory charge onthat asset may be taken. However, its fair value is included in goodwill in the finalallocation of purchase price and is not separately represented.TRADEMARKS/TRADE NAMEIn this example, Target Company has one valuable trade name. However, a companymay have many trademarks/trade names, some with indefinite lives and some withfinite lives. Depending on the purpose and scope of the valuation, each name or markmay be valued separately. 14All of the Company’s products and services are sold under the ‘‘XXX’’ tradename, and each major product is identified by this trade name. Upon acquiring Target
Exhibit 3.8 Target Company Valuation of Trade Name as of December 31, 2006 ($000s)2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(1) Net Sales from Business Enterprise Analysis $69,000 $79,350 $89,269 $98,196 $108,015 $116,116 $124,825 $134,187 $144,251 $155,070Pretax Relief from Royalty 2.0% $1,380 $1,587 $1,785 $1,964 $2,160 $2,322 $2,497 $2,684 $2,885 $3,101Income Tax Liability 40.0% 552 635 714 786 864 929 999 1,073 1,154 1,241After-tax Royalty $828 $952 $1,071 $1,178 $1,296 $1,393 $1,498 $1,610 $1,731 $1,861(2) Present Value Income Factor 16.0% 0.9285 0.8004 0.6900 0.5948 0.5128 0.4421 0.3811 0.3285 0.2832 0.2441Present Value Relief from Royalty $769 $762 $739 $701 $665 $616 $571 $529 $490 $454Sum of Present Value Relief from Royalty, 2007–2016 $6,296Residual Calculation:2016 After-tax Royalty $1,8612017 After-tax Royalty, Assuming Growth of 5.0% $1,954Residual Capitalization Rate, Perpetual Growth 5.0% 11.0%Residual Value, 2017 $17,764(2) Present Value Factor 0.2441Fair Market Value of Residual 4,336Present Value of Trade Name Royalty Flows 10,632Amortization BenefitDiscount Rate 16.0%Tax Rate 40.0%Tax Amortization Period (Years) 15Amortization Benefit 2,027Fair Value of Trade Name, Rounded $12,660Footnotes:(1)Figures shown from Business Enterprise Analysis (BEA)–Cash Flow Forecast (Exhibit 3.5)(2)Based on mid-period assumptionNote: Some amounts may not foot due to rounding.# Copyright 2007 by FVG Holdings, LC and Financial Valuation Solutions, LLC. All rights reserved. Used with permission.84
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VALUATION FORFINANCIALREPORTINGFair
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VALUATION FORFINANCIALREPORTINGFair
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To our familiesnear and faryoung an
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PrefaceThe second edition of this b
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AcknowledgmentsTo Deanna Muraki, th
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xivAbout the Authorsappraiser with
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Valuation for FinancialReportingFai
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Appendix 1.2Pronouncements Excluded
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Exhibit 4.3 Target Company Business
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Exhibit 4.4 (Continued)Actual Forec
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Exhibit 4.8 Target Company Valuatio
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Exhibit 4.9 Target Company Valuatio
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210 IndexBusiness Enterprise Analys
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212 IndexGoodwill (continued )111,
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214 IndexLong-termcapital, 71debt,
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216 IndexSecurities and Exchange Co
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