[Question] Question on Goodwill creation in a CC

[Sunil Shah]

Hello there everyone I have a question on Goodwill in a CC

I am about to buy a business for 2m rand, but it only has physical tangible assets of 0.5m R
This will be the purchase of an existing CC
I am going to pay the owner 2m rand.
however I am taking a loan to purchase the cc.
I AM CONVINCED I SHOULD BE ABLE TO MAKE THE INTEREST DEDUCTIBLE
THE WAY I SEE IT, I SHOULD CREATE A GOODWILL ENTRY (DEBIT) OF 1.5M AND A CREDIT SHAREHOLDER LOAN FOR 1.5M
ALTHOUGH THIS NEW CAPITAL IS NOT GOING INTO THE CC, IT IS AN INTANGIBLE ASSET I AM BUYING FROM THE CURRENT OWNER.

Does anyone see a problem with my proposal. Or do you have a better way of effecting the above.
Your help would be greatly appreciated and I am sure the question is pertinent to other members

Thank you in advance!
Sunil

[Justloadit]

Goodwill is over rated, and in many instances lies in the 'personal owner' of the business.
How sure are you, that once you take over, you will not lose the clients?
What about a restraint of trade?
What guarantees have been put on the table, with respect to turn over and profits?
What about the staff? Are they willing to stay with you?
How many years service? the reason I ask is if you can not work with a number of them, it will cost you to get rid of them.
What about the debtors book. How many CODs, 30 day, 60 day and 90 day and over is oustanding. What oercentage does it make up of the turn over each time period.
Too many questions.........
Purchasing a business with a value of R2m better be damn good, that's a lot of money!

Have you seeked legal advice or a company that specialises in business selling?

This is a substantial amount of money, and on top of it, you are talking about getting a loan. This is already a handicapped way to start. You need to earn an income and simultaneously service a loan.

[IanF]

I would suggest you purchase the business from the CC which includes the goodwill. I would also list all the assets to balance to the R2m. In the purchase agreement.
If it makes sense get valuations of all the fixed assets so you have a higher base for wear and tear allowances.
As you a CA I suggest you get tax advice on the deductabilty of the interest.

[CLIVE-TRIANGLE]

There are a few issues before one can get to your actual question.

1. Are you buying the member's interest in the cc, or are you buying the business of the cc?
2. What does the sale agreement say about Goodwill (or the breakdown of the purchase price)?

On the face of it from what you say, you are buying member's interest. If so;

3. Are there liabilities that you will acquire (not much doubt in that if you are buying member's interest)

If that is the case, then there is no goodwill. The owner disposes of his "shares" to you. The cc is not really involved.

4. If you are buying the business from the cc, then the sale agreement should preferably break down the price (but not essential). The excess of price less net asset value would be goodwill. Goodwill can only ever be purchased. In your mind you sell goodwill, but that is profit on sale. Only a purchaser can acquire goodwill and it is the price less net asset value of the acquisition.

The answers to your other questions about the interest and so on are dependent on what and how you are buying.