Winning Back-Office Strategies to Boost Your Business Agility
VIEWpoint Issue 1 | 2023
2023 Compliance Trends: Staying Ahead in an Evolving Regulatory E...
As a business owner, you undoubtedly have created some personal goodwill in the business – intangible assets that originated from your personal efforts. You may not realize that these same efforts that have helped build your business into what it is today can help you minimize taxes and increase your proceeds when selling a business, without much negative impact on your buyer. The M&A advisors at Doeren Mayhew explain.
The International Glossary of Business Valuation Terms defines goodwill as “that intangible asset arising as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified.”
Sometimes goodwill is defined as the difference between a company’s fair market value and its net tangible (asset) value. This broad definition may lump identifiable intangible assets together with goodwill. In fact, Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and Other Intangible Assets, lists the identifiable intangible assets that appraisers can value separately from goodwill.
Goodwill can be further broken down into two types:
Some distinguishing features considered when analyzing goodwill include:
When selling a business, tax implications are a major seller concern, but especially in the case of a C corporation, which is taxed at both the corporate and personal levels. For such business sales, a good deal of tradeoff exists when weighing the transaction type – what’s favorable for the buyer is often not as optimal for the seller, and vice versa.
Where personal goodwill comes into play is the asset sale. While this transaction type can position the buyer more favorably, it also allows the seller to allocate purchase price to personal goodwill to reduce tax rates and increase after-tax proceeds.
Consider this example:
* Assumes material participation; 3.8% Medicare tax added otherwise
In closing, when used effectively under an asset transactional structure, allocating purchase price to personal goodwill can help to mitigate tax exposure on the sale and increase after-tax proceeds. The buyer benefits from the step-up basis under an asset deal, while the seller increases his dollars – a win-win for all parties.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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