How do I evaluate goodwill when buying a small business?

Goodwill is the part of a price that no listed asset explains. For a small business, it is worth testing piece by piece rather than accepting it as one figure. This page does not say what goodwill is worth. It covers how to ask where it comes from and how the allocation of the price is treated for tax. Ask an accountant to help with any number you rely on.

What the goodwill is made of

Ask the seller to say, item by item, what you would be paying for beyond equipment and stock. Candidates include customer relationships, the business name, a good location, trained staff and supplier terms. Then ask for evidence of each, such as customer records over several years, and whether the seller can show that the revenue is not tied to one person.

Will it stay after the owner leaves?

Test whether any of the goodwill sits in the owner’s personal relationships. Ask how many customers deal only with the owner, whether key employees will stay, and how long the seller will help with the handover. A lease that cannot be assigned or renewed can also remove a location-based advantage. See what to check in the lease.

The non-compete and the price allocation

Ask whether anything would stop the seller opening a competing business next door, and consider asking for a restrictive covenant. Under section 68 of the Income Tax Act, where an amount can reasonably be regarded as being in part consideration for a disposition of property, for services or for a restrictive covenant, each part is treated according to what it can reasonably be regarded as paying for, regardless of the form or legal effect of the contract.

Tax and financing consequences

The Canada Revenue Agency includes goodwill acquired after 2016 in Class 14.1, depreciable on a declining-balance basis, with the existing capital cost allowance rules normally applying. BDC lists financing for intellectual property, goodwill and client lists among what it offers for acquisitions, so ask any lender whether it will fund the goodwill part of your price.