Putting a price on goodwill
14:30 (GMT+2), Thu, 26 July 2012
Peter O’ Halloran
When a business is sold, there’s an important intangible element, over and above the assets of the company and the income stream, that has to be taken into account.
Goodwill is a highly desirable, intangible element that might (or might not) be present when a business is sold, The best brands that appear in the marketplace are sold for huge amounts of money because of this factor. Recognition of the
brand, its track record, the value, the quality, the availability, the freshness, the ease of use and the service that goes hand in hand with the brand could all be factors that would serve to create ‘goodwill’, a positive feeling in the minds of the general public towards the brand.
How to place a value on goodwill is a topic few will agree upon. Practically, however, the goodwill value is this: if a firm is sold, the value of the consideration over and above the value of the assets that a prospective purchaser would be willing to pay, and the value over and above the asset value of the firm that a seller would accept.
In Botswana, goodwill is taxed upon the sale of a company. The principle is fairly straightforward from the tax viewpoint. That is, the recognition the firm or brand has built up over time by means of advertising and marketing, all of which are tax deductible as costs to the company. Therefore, when the goodwill is sold, the value of the goodwill, attributable as it is to the marketing and advertising efforts, should be taxable.
Note that goodwill is associated closely with the name of the enterprise and often actually rests in a person. Their trade workshop or professional practice might be sold and the goodwill might not accompany the sale because, in real terms, the goodwill is vested in the person, not the practice or shop. This is usually the case in smaller enterprises.
If such a businessperson does nothing about the situation, they’ll never enjoy the benefit of goodwill as such (except to the extent that clients will prefer to do business with them as a result of their reputation) and the goodwill might die with them.
However, it’s possible to incorporate structures to ‘house’ the goodwill apart from the person, during their lifetime.
The purchase of such goodwill by the new incorporation might be, quite legitimately, a tax deductible expense and the sale thereof by the professional will result in the vesting of the goodwill in the hands of the seller, who will then enjoy its benefits.
The resulting structure will be tax friendly. If planned correctly, wealth is realised for the family of the seller of the goodwill.
Peter O’Halloran is head of tax at BDO, Gaborone.
Contact Peter on 00267 390 2779 or at firstname.lastname@example.org. Please state ‘Tax’ in the subject line of your email.
Issue date: 13 July 2012
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