Admission of new partner goodwill method

The Goodwill Method is a common approach used to value the non-controlling interest (NCI) of a new partner in a business combination. Here's a step-by-step guide on how to apply the Goodwill Method:

Step 1: Determine the NCI

Identify the non-controlling interest (NCI) of the new partner, which is the proportion of the target company's equity that the new partner will own after the acquisition.

Step 2: Calculate the NCI's share of the target company's equity

Calculate the NCI's share of the target company's equity by multiplying the NCI by the target company's total equity.

Step 3: Determine the value of the target company's equity

Determine the value of the target company's equity using the acquisition method (e.g., net asset value, discounted cash flows, or a combination of both).

Step 4: Calculate the NCI's share of the target company's equity value

Calculate the NCI's share of the target company's equity value by multiplying the NCI's share of the target company's equity (from Step 2) by the value of the target company's equity (from Step 3).

Step 5: Determine the goodwill

Determine the goodwill by subtracting the NCI's share of the target company's equity value (from Step 4) from the total consideration paid for the acquisition.

Step 6: Allocate the goodwill

Allocate the goodwill to the NCI based on the NCI's share of the target company's equity.

Example:

Suppose a company acquires a 60% stake in a target company for $1 million. The target company's equity is $500,000. The new partner will own 40% of the target company's equity.

Step 1: Determine the NCI

NCI = 40%

Step 2: Calculate the NCI's share of the target company's equity

NCI's share of equity = 40% x $500,000 = $200,000

Step 3: Determine the value of the target company's equity

Value of equity = $500,000

Step 4: Calculate the NCI's share of the target company's equity value

NCI's share of equity value = 40% x $500,000 = $200,000

Step 5: Determine the goodwill

Goodwill = Total consideration - NCI's share of equity value = $1,000,000 - $200,000 = $800,000

Step 6: Allocate the goodwill

Goodwill allocated to NCI = 40% x $800,000 = $320,000

In this example, the goodwill allocated to the new partner is $320,000, which represents 40% of the total goodwill of $800,000.

The Goodwill Method is a simple and widely used approach to value the NCI of a new partner. However, it may not always reflect the true value of the NCI, especially in cases where the target company has significant intangible assets or other complex valuation issues.