How does goodwill affect the price when I sell my business?

Goodwill is the part of a price that is not tied to equipment, inventory or property. The British Columbia government’s PST guide to buying and selling a business defines it as the value of a business’s good reputation and relationship with customers beyond the value of the other business assets. If your customers return because of who you are, goodwill is what you are asking a buyer to pay for. How much it adds is a matter for the valuation.

Goodwill and the multiple

BDC says many factors can influence which multiple is used to value a business, including goodwill, intellectual property and the company’s location. In that description, goodwill is one factor in choosing the multiple. Because BDC says multiples also vary by industry and market conditions, ask the valuator how they treated goodwill and why.

Goodwill in an asset-based view

BDC explains that asset-based valuation considers both tangible and intangible assets owned by the business. Goodwill is an intangible. If the valuator confirms an earnings-based figure with an asset approach, the intangible side is where reputation and relationships show up. If the business depends on your personal relationships, ask the valuator how that affects the goodwill they recognize.

Allocating the price

In an asset sale, the price is split among the assets, and goodwill is one of them. For tax, the Canada Revenue Agency places property that is goodwill, from January 1, 2017, in Class 14.1 of depreciable property. Sales tax depends on the province. In British Columbia, for example, the B.C. government says PST does not apply to goodwill, but the value of the goodwill the purchaser and seller agree to must be reasonable, and they cannot raise the goodwill price and cut taxable assets below fair market value to avoid PST. The tax side is covered in how goodwill is taxed when you sell. Whatever allocation goes into the agreement, have your accountant review it.