Encyclopedia
Goodwill
The value of a business beyond its tangible assets, such as reputation, customers and name.
For example: A buyer pays more for a café than its equipment is worth because of its loyal customers. (Illustration only, not a real deal.)
Official source: Income Tax Act (Justice Laws)
Example only, not a real client. Say you are buying a well-known restaurant with its building. Part of the price reflects the business’s reputation and customer base, not just the property and equipment. You and your accountant agree how much of the price is goodwill and how that affects tax.
What I’d tell a friend
When buying a business, separate what you pay for the property from what you pay for the business itself.
Why it matters to you
Buyers will test whether it's real and whether it stays after you leave. If it depends on you, expect a lower price or an earn-out.
How to use it in your deal
Buyers should check what drives goodwill, especially whether it depends on the seller personally or on a lease that may not be renewed. Verify revenue with financial statements and tax returns, and look at customer and supplier concentration. Use non-competition agreements and transition support to protect goodwill.
The lease is often key, since losing the location can destroy goodwill, so confirm the lease term and assignment consent. For tax, goodwill bought since 2017 generally goes into capital cost allowance (CCA) Class 14.1, replacing the old eligible capital property rules; ask an accountant about how the purchase price is allocated.
Sellers should document systems and relationships so goodwill transfers. Lenders often lend less against goodwill, so buyers may need more equity or a vendor take-back. Ask the seller to stay on for a transition period, introduce you to key customers and suppliers, and keep the business name and phone number working.
Review online reviews and local reputation, which can shift fast after a sale. If most revenue comes from a few customers, check whether they have contracts that survive a change of ownership.
Mistakes I see
Paying for goodwill tied to the seller. Ignoring lease risk. Poor price allocation.
In BC and Vancouver
The Income Tax Act sets tax treatment; Canada Revenue Agency (CRA) guidance covers CCA classes.
Official sources: CRA: claiming capital cost allowance · Income Tax Act (Justice Laws)
What it is
Goodwill is the value of a business beyond its physical assets, such as its reputation, customers and location.
In a sale of a business with real estate, the price is often split between land, building, equipment and goodwill.
What to check
Look at the business’s financial history to support the goodwill value.
Ask your accountant about the tax treatment and allocation, and consider a non-competition agreement from the seller to protect what you pay for.
Questions to ask before you sign
- What drives goodwill?
- Does it depend on the seller?
- Is the lease secure?
- How is price allocated?
Keep reading
Related terms: Asset sale, Seller's discretionary earnings (SDE)
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.