Use Fair Market Value to Value Goodwill

by Sean Ross

1 min read

If you’re considering buying a business, whether an initial purchase to get started with established clients or to add on to your existing business, you probably want to be familiar with fair market value and goodwill. The Canada Revenue Agency requires you to determine the fair market value of the identifiable assets when you purchase a business, provided the breakdown of the individual assets is not given at the time. You’ll allocate the purchase price to the various assets at the fair market value. For instance, say you pay $1 million for a business, and the assets are accounts receivables, inventory, and equipment. You determine the fair market value of the collective components at $800,000. The difference between the $1 million purchase price and $800,000 fair market of the identifiable assets is goodwill. The fixed assets and goodwill are eligible for a capital cost allowance, or depreciation, by the CRA. You can write off goodwill and the cost of other fixed assets over a period of time, depending on the class. This can help you save on your taxes, but you should be wary about spending too much on acquiring a business. If things do not work out as planned, your business is going to have to write down goodwill. This means you paid too much for the business based on its performance. It is important to become familiar with fair market value and goodwill at the outset of the acquisition process. This makes you a more disciplined buyer, and helps prevent you from overpaying for a business.

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