What is goodwill and how is it paid for in a business sale in British Columbia?
This answer covers the law of British Columbia.
Goodwill is the value of a business beyond its individual assets, such as its customers, reputation, location and reliable earnings. In an asset sale, the price is allocated to each asset at fair market value, and the remaining balance is attributed to goodwill.
That allocation matters for tax. Since January 1, 2017, goodwill is depreciable property in CCA Class 14.1, claimed at 5%, and the buyer's allocation should match what the vendor reports. On a PST asset sale, goodwill is non-taxable, but the parties cannot raise the goodwill price and lower taxable-asset prices to avoid PST. In a share purchase, the corporation's asset tax values do not change.
Payment is negotiated. Goodwill may be paid in cash at closing, through vendor financing where the seller is paid over time, or through an earn-out tied to future results. A seller who finances part of the price may register a security interest in the Personal Property Registry. How goodwill is valued depends on the business, so ask what the figure is based on. Ask a lawyer and accountant to review the structure.
Key takeaways
- In an asset purchase, the price is allocated to each asset at fair market value and the remaining balance is goodwill.
- Goodwill is depreciable property in CCA Class 14.1, claimed at 5%, and the allocation should match what the vendor reports.
- On a PST asset sale goodwill is non-taxable, but the parties cannot shift price into goodwill to avoid PST.
- Goodwill can be paid in cash, through vendor financing or through an earn-out, depending on what the parties negotiate.