Secret processes are even a poorer basis of capitali zation than patents. Not only is a process subj ect to all the risk of a patent, except the time limit of its existence, but it is likely to be divulged and thus lose any special advantage the company had thru its use. Being secret, investors have no way of judging in advance the value of the process, except by the out put, and it may be discovered too late that a process has been capitalized which has never existed, or which is nothing more than a matter of common knowledge in the industry.
10. Valuation of good-will.—The good-will which attaches to a trade name is of more definite value than either patents or trade processes, but even here the same inability to measure value is apparent. How is any one to tell whether the success of an established concern has been due to the superior management of certain men connected with it, or whether the good will attaches to the concern itself ? Many cases could be cited in which the withdrawal of a single individ ual from an established business has resulted in prac tically wrecking its good-will within two or three years.
One instance is recalled in which an established and successful company, making annual profits between $40,000 and $60,000, or at the rate of from 20 to 30 per cent upon its capitalization, was practically wrecked in five years by an incompetent new manage ment. And yet the good-will of this business had been capitalized in combination at more than $300, 000. Under the old management, never less than 10 per cent had been paid on this inflated capitalization. Under the new, the trade-name was soon dropped and dividends almost ceased. Some questions are of interest here. Was the good-will overvalued at $300, 000? If not, what salary was the old manager worth, and what salary the new? Was the good-will per sonal or corporate? The capitalization of intangible assets, such as have been mentioned above, formed the basis of the stock watering operations of the industrial trusts, and of the enormous profits which the promoters of those trusts were able to secure. The safest way apparently
to overcapitalize a company is to assign an extrava gant value to intangible assets which are exchanged for securities. The only test of the value of such assets is found in their probable earning power, and this is so uncertain that rarely can a capitalization based upon it be successfully attacked in the courts.
The matter of a good-will and its place in the bal ance sheet is still the subject of periodical discussion in Canada. A large industrial company of the Do minion for years carried good-will in its balance sheet at $1,000,000. The item was reduced to the nominal sum of $1. This was the company's explanation: A recent appraisal of the company's properties, made by competent valuators, established their real value at over $2,000,000 in excess of the figures at which they were being carried on the books of the company; and the directors therefore felt justified in adding $860,304.03 of this excess to property accounts. This, with $169,694.97 transferred from the profit and loss account, enables the company to write down the item of $1,000,000 for good-will, trade marks and patent rights to the nominal figure of $1.
In valuing good-will or other intangible assets of companies, it is noticeable that there is a greater dif ference in such valuations than is found in the valua tion of physical assets. Allowance must be made for differences of opinion in estimating values.