What does goodwill represent when selling a business?

Goodwill is the part of a sale price that is not explained by the identifiable assets. The tax side is covered in how goodwill is taxed when you sell. This page is about what the term means, where it appears in a sale and why buyers examine it.

What it represents

Treadstone Law, an Ontario law firm, describes goodwill as the gap between what a business’s tangible assets, such as equipment, inventory and receivables, less liabilities, are worth on their own and what a buyer is willing to pay for the whole operating business. British Columbia’s government describes it as the value of a business’s good reputation and relationship with customers beyond the value of the other business assets.

Where it shows up in the sale

The CRA says that in some cases the sales agreement sets a price for each asset, a value for the inventory and, if applicable, an amount attributed to goodwill. In British Columbia, the province says the goodwill value the parties agree to must be reasonable, and that parties cannot raise the goodwill price and lower the taxable assets below fair market value to avoid PST.

Why buyers look at its quality

BDC says many factors can influence which valuation multiple is used, including goodwill, intellectual property and the company’s location. The Treadstone article says a large goodwill figure is not automatically a problem, and a small one is not automatically safe; what matters is whether it is durable. It separates goodwill that belongs to the business from value tied to the current owner, and asks whether key staff will stay after the sale.

How it is classed for tax

The CRA says that from January 1, 2017, goodwill is included in Class 14.1 for capital cost allowance. The Excise Tax Act also has its own GST/HST rule for goodwill in the sale of a business, in section 167.1.