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A Glance at Goodwill

This is the most common word used in businesses related transactions. In the business world everything has its own value and each component’s value varies from location to location, from item to item, and even based on time. In a business purchase or business evaluation, there are some items/things which you can see and some you cannot see. Those you can’t see have value and those are called goodwill, which falls under the category of intangible assets of the business. This is built up over a period of time based on the efforts, services, work rendered by the business and business owner and also the reputation of the business.

Sometimes, this is also considered seller’s equity/seller asset/seller savings/seller reserves, etc. Most of the time, it is the value paid by the buyer over the fair market value of the net assets, when buying or acquiring a business.

Why should I pay?

This is the seller’s effort to build the business with his ideas, hard work, business plans, customer service, offering of services, etc. These all are accumulated, day by day, in the form of reputation, pride, and the greatness of the business and business owner. As a prospective buyer you are transferring all developments, reputation, pride, and cash flow of the business that was built buy the seller over a period of time.

How much do I have to allocate for goodwill?

Now, we want to know what portion of the purchase price pertains to goodwill and how to negotiate on that value. There is no specific law or specific amount to allocate as the goodwill amount. However, most of the time, this negotiation is directly between the buyer and seller upon learning the estimated or apprised value of the tangible assets. This negotiation is based on the type of lease, hours of operation, zoning changes, types of services offered by the business, cash flow of the business, etc. It is always a good idea to consult respected professionals to get their advice before giving the price and allocation of purchase price for the goodwill amount.

Lenders view on the goodwill

Sometimes a buyer or seller will have a higher amount of goodwill for their personal reasons and benefits. Lenders always keeps an eye on the goodwill portion as this is the intangible assets and for any significant increase on the goodwill amount beyond the market practice they may ask the borrower to inject more down payment or additional collateral to reduce the risk of lending.

Tax impact of goodwill

There is a significant amount of tax that will apply to both seller and buyer whenever they sell or buy a business. Please take advice from your tax consultant and they will guide you through buying and selling a business.

If you want to know more about goodwill and the methods of goodwill calculations, or have further questions on goodwill, or need further assistance on goodwill issues, please contact us at help@bizworldusa.com or 415-234-8833 and one of our associated business professionals will contact you.