Goodwill for sole trader

Psyche
Psyche Registered Posts: 187 ? ? ?
Hi all, any goodwill experts in the house?

I have a sole trader who has incorporated. It's a live music promotions business that barely scrapes by if truth be told. However, it's got a long established reputation in its nice so there should be some goodwill that goes with the promotions company.

The typical net profit while a sole tradership was £5k, but one of the past three years there was a loss, so the average profit was £2500.

I have read the advice that the director's salary should be deducted from this figure, but obviously even a small salary of say £12k would cause the goodwill to go negative. The company director can afford not to pay himself a salary as he has other income sources. Also, any goodwill would evaporate if someone else were hired, since it's the promoter's reputation that creates the goodwill in the first place.

My question is how would you value the goodwill? My inclination is to use the higher, 1.5 multiplier, since the single loss-making year was an anomaly due to a bereavement, and the business has a long history. However the lack of a salary makes me think I should play it safe and use 1. The sole tradership does not have a balance sheet, the records have not been that well kept (but there are few tangible assets other than maybe a laptop).

Thanks for any advice!

Comments

  • jamesm96
    jamesm96 Registered Posts: 523
    I'm afraid, if it were me, I wouldn't capitalise any goodwill, for two reasons.

    HMRC will expect to see an adjustment for 'manager's salary'. They want to see what the true commercial profits are (i.e. the value that's being generated by the goodwill), rather than the profits that it makes because the owner doesn't need income; they'd want to see a reasonable market salary for someone to do that job. That'll wipe the profit out entirely so there's no goodwill - the reputation, good though it may be, is not capable (historically) of generating any profit, so it has no value - no investor in an 'arms length' investment would pay anything for it.

    The second issue is what you mention about the personal reputation. For a goodwill capitalisation, the goodwill needs to be transferable, and not attached to the director personally, so HMRC will contest on that basis too.

    Hope that helps,

    Mike.
  • deanshepherd
    deanshepherd Registered Posts: 1,809
    Your comment "..any goodwill would evaporate if someone else were hired, since it's the promoter's reputation that creates the goodwill in the first place." is very telling. If that genuinely is the case then, as Mike says, zero goodwill.

    In cases I have seen contended by HMRC I have never seen them look at a deduction for owners salary. I think that is one of those things accountants like to put into a valuation just for the sake of it. I have never seen an accountant do it when valuing their own practice!

    Looking at it more commercially, who would be willing to pay for the business? Someone already involved? (e.g. an employee or associate) or someone running a similar business who does not need to withdraw a directors salary but just wishes to incorporate the brand (or more likely the contact list) within their own business.

    If you can argue that the contact list does have value, independent of the owner, then I would use that as a basis for goodwill. My gut instinct is that someone wanting to get into the business would indeed pay for it. How much they would pay is for you and HMRC to argue over but I suspect we are talking hundreds rather than thousands.
  • mickwood83
    mickwood83 Registered Posts: 12 Regular contributor ⭐ ? ⭐
    May be a silly question, but why incorperate the business if usual profits are only circa £5k?
  • Antoinnette
    Antoinnette Registered Posts: 118 ? ? ?
    As I understand it the goodwill has to be "free" i.e independent of the sole trader's reputation, otherwise HMRC might refuse it. If he sold the business to someone else will his present customer list still be available to whoever buys it? As a llive music promotion business I strongly believe it would be very valuable. Like Dean I think someone will pay quiet a bit forthe customer list and I would use that as the basis of goodwill as well although I would argue that a good customer database maybe worth a few thousand :001_tt2:
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