Financing goodwill

Financing goodwill

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A client is planning to buy a profitable company. This company has never valued its goodwill. The client is having to borrow personally to buy the company and will need to withdraw funds to meet repayments.

Is it entirely wrong to value the goodwill with a corresponding credit to the director' loan, with drawn funds set against that director's balance? My understanding is that it would be wrong, and the director will have to meet the loan repayments from funds drawn as salary/dividends. 

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By johngroganjga
13th Oct 2015 11:07

You are right. The target company can't recognise internally generated goodwill. Even if it could, the credit would be to equity not the new shareholder personally.

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paddle steamer
By DJKL
13th Oct 2015 12:15

Should he consider instead lending the funds he has borrowed to a holding company which buys the shares in the target?

Taking such an approach does create a director's loan account to the parent capable of being repaid and the sub can either pass up dividends to the holding company to enable the repayment or cross lend funds.

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By User deleted
13th Oct 2015 12:33

A subsequent hive-up of the trade and assets would then give the desired result, with the Goodwill in the price paid for the shares in the acquired subsidiary being rolled into the new company.

 

The may be an issue with the credit rating etc of the new entity, as it will have no history.

 

However, this is likely to be explainable where the lenders etc are friendly

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