Goodwill
Goodwill is the portion of a purchase price that exceeds the value of a business’s identifiable assets — its reputation, customer relationships, brand, trained staff and earning capacity. In an asset sale it is a separate line in the purchase price allocation, and it has its own tax treatment.
If a business sells for $1.2 million and its equipment, inventory and receivables are worth $500,000, the remaining $700,000 is goodwill. It is real value — it is why the business earns more than its equipment would on its own — but it is also the part a buyer scrutinises hardest, because it is the part that can evaporate if customers or staff leave.
Why the allocation matters to both sides
In an asset sale, buyer and seller must agree how the price is split across asset classes, and their interests do not align. Sellers generally prefer more of the price allocated to goodwill; buyers generally prefer more allocated to depreciable assets they can write down faster. The allocation is a negotiated term with real tax consequences on both sides, so it belongs in the agreement rather than being left to the accountants afterwards.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Treadstone LawLegal commentaryHow Goodwill Is Taxed When You Sell a Business in Ontario
- 03Treadstone LawLegal commentaryBuying & Selling a Business
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