3. Fixed or capital assets.—The first class of as sets to be enumerated comprises physical equipment, such as real estate, buildings, machinery and appa ratus. It is a practice frequently employed in the financing of certain enterprises to overstate the value of these items as compared with cost or probable selling price. This cannot be said to be due to the lack of proper means of valuation, for the engineering profession has developed fairly accurate means of ap praisal.
4. Intangible assets.—Another class of fixed or capital assets consists of intangible properties, such as charters, leases, licenses and contracts. Besides these there should be included the value of patents, going value, organization expense (unless allowed for in the valuation of physical plant) and good-will.
In the organization of a business there are expenses other than for materials and labor for the construc tion of the physical plant. It involves expense to promote an enterprise. Options on property must be secured, a charter, franchises and consents must be obtained, negotiations having to do with making a financial plan and with the underwriting and selling of securities must be carried thru. Patents must be secured, general supervision during construction must be given, interest on money invested during the period of construction must be foregone, the operating ex penses before any revenue begins to flow in from operation must be borne, trade connections must be developed and perfected, and the losses represented in the difference between the revenues of early years and the revenues of a fully developed business must be absorbed.
In certain cases where the property of public util ity corporations has been valued for public purchase or rate control an effort has been made to distinguish going value from organization expense. In the Dubuque, Iowa, water works appraisement, Mr. John M. Baldwin drew this distinction as follows: Going value consists of the element of earning power which a plant possesses, growing out of its having an assured busi ness in excess of what a new plant starting without any busi ness would have, and it is measured by the sum of the yearly amounts of revenue, reduced to present value, which such plant in operation will produce in excess of what new works of a like character can be made to produce, between the time of purchase and that time in the future when the revenue of the two works become equal ; proper allowance being made for differences in cost of maintenance.
In general, the intangible assets, in so far as they are enumerated separately from real estate and buildings and equipment are covered under the heading "good-will." In a number of waterworks valuations, going value and good-will have been esti mated at from 9.6 per cent to 4 per cent of the value of the physical property, or from 60.5 per cent to 330.5 per cent of gross revenue. In industrial cor porations even these limits are sometimes far sur passed. Among such companies there is the utmost diversity of practice. Instances of great conserva tism may be found, as in the valuation of patents, franchises and good-will at $1.00 by the General Electric Company, and by the Goodyear Tire and Rubber Company. On the other hand, the balance sheet of the American Rubber Company includes 38.2 per cent of the total assets under the heading "brands, trade-marks, patents, good-will, etc." In the B. F. Goodrich Company's balance sheet, 60.9 per cent of the assets are under "good-will and patents." A tabulation of some of the largest good-will en tries among American industrials is given below, for the year 1914.
Percentage Corporation Total Good-Will of total Year's Assets assets purchase B. F. Goodrich Co. $94,936,954 $57,798,000 60.9 F. W. Woolworth Co. 74,444,730 50,000,000 67.2 11 Sears, Roebuck Co. 77,725,078 30,000,000 38.6 Studebaker Corp. 56,530,336 19,807,277 35.1 May Department Stores Co. 36,314,167 15,525,310 49.6 9 Underwood Typewriter Co. 18,127,160 7,995,720 44.3 13 Library 3,999,194 1,500,000 37.5 An old rule for the valuation of good-will was to the effect that it should not exceed three years' pur chase of the net income—that is to say, it should not be more than the present worth of an annuity equal to the net income for three years. In spite of the ap parently excessive valuations indicated in some cases it should be borne in mind that the "old rule" is sub ject to adjustments to meet present-day conditions. The value which attaches to brands, labels and trade names, as a result of extensive publicity will, for ex ample, materially increase the true valuation of in tangible property. For this reason it is impossible to prescribe any set formula to be employed in all instances. It need hardly be said, however, that as sets of such uncertain value must be given the closest scrutiny of the investor in order that he may dis tinguish between fictitious and real valuations, be tween actuality and a promoter's optimism.