ClarityBV Blog

What is the floor value of a domestic dealership franchise (i.e. blue-sky or goodwill value)?

For Chrysler dealerships, it might be $-0- (zero) or less.

• “Chrysler Group, which rejected 789 dealerships during bankruptcy, hasn’t paid for the franchises of the dealers involved. But the automaker is paying all incentive and warranty rebates due them, said Chrysler spokeswoman Kathy Graham.” (Automotive News)

For Ford dealerships, it might be $1 (one dollar) or less.

• “More than half the dealers in Ford Motor Co.’s dealer development program have purchased their stores under a plan that allowed them to buy out the company’s interest for $1, and all but two of the rest intend to do so, the automaker says.” (Automotive News)

For General Motors dealerships, it might be $450,000.

• “General Motors Co. has allotted an average of about $450,000 for each closed dealership, according to data in the congressional testimony of GM executives.” (Automotive News)

Although NADA is arguing for higher payouts, I would think many disbanded GM dealers are secretly happy to take $450,000 and run. The bigger problem may be what to do with their dealership property in this market…

(Note: Names and amounts used in this case study have been changed to protect the innocent.)

The Problem:

Can a business purchased at a discount have intangible asset value? What happens to negative goodwill in accounting for a purchase?

The Background:

Acme Inc. paid $25 million cash for the operations, inventory, and equipment of ABC Co. The appraised value of ABC’s machinery and equipment alone was $35 million.

Clearly, this was a bargain purchase. It shows that on a going concern basis a business may sell for less than its liquidation value.

The Solution:

Management of Acme Inc. engaged us to assist them in their purchase price analysis. A careful look at the purchase agreements uncovered four identifiable intangible assets.

The difference in value between the acquired assets and the purchase price represents negative goodwill. Under current accounting standards, negative goodwill was allocated to the non-current assets on a pro rata basis.

In this example, negative goodwill was $20 million. This is the difference between the purchase price of $25 million and the $45 million fair value of assets acquired.

Because negative goodwill ($20 million) was one-half the fair value of the non-current assets ($40 million), the “allocated” value recorded for each non-current asset was one-half of its fair value.