2017-03-08 00:00:00Business PlanningEnglishDetermining fair market value and goodwill are important concepts to know for you to be a disciplined buyer.https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Woman-at-home-based-office-sorts-through-clothing-while-viewing-fair-marketo-value-on-tablet.jpghttps://quickbooks.intuit.com/ca/resources/business-planning/use-fair-market-value-value-goodwill/Use Fair Market Value to Value Goodwill

Use Fair Market Value to Value Goodwill

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.

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

Switching Personal Assets to Business Assets: A Guide for the Self-Employed

When you start your own business, you typically have to invest some…

Read more

Advising Qualified Donee Clients About Gift Receipts

If you represent charities or certain nonprofit organizations, you may need to…

Read more

How to Bring Personal Assets Into Your Small Business

In some cases, you may need to transfer personal property to your…

Read more