Is Goodwill Shown in Balance Sheet?

[chasdad]

I've been looking at a (leasehold) business that is currently for sale and have a copy of their accounts for the past 2 years.

The owners want just over £20k for the business that they bought 18 months ago. The balance sheet shows they put £11k of cash in, £100 was share Capital leaving £10.9k. In the balance sheet it shows the original assets as £7k listed as fixtures and fittings.

I've brought this up with the agent and they say that they bought the business for £20k, £7k fixtures and fittings and £13k for goodwill. The agent goes onto say that as Goodwill is not a tangible asset it doesn't appear in the balance sheet. They also claim that the current owners have legal documents to confirm their purchase price of £20k.

If it makes any difference this is a limited company.

Can anyone shed any light on this situation?

 

[@aiteoconsulting]

I presume this is a standalone limited company with individual shareholders.The £20k the current owners paid for the business will have been paid to the previous shareholders and will not appear in the company accounts. As these accounts are likely to be micro-entity accounts, I doubt there is sufficient information in them to show that they put £11k of cash in there? If they did, that would be in addition to the purchase price of £20k. I'm wondering if you are looking at the retained earnings number, some or all of which could have been brought forward from the point they bought the business.

 

[chasdad]

Both year end accounts have 'Other Creditors' of £10.9k, have just assumed this was cash owed to the directors as there appears to be no other identifiable creditors as this is mainly service/cash sales business.

So as this is a micro entity the intangible assets will not be shown in the accounts? Therefore, cannot be depreciated?

 

[@aiteoconsulting]

It may indeed be cash owed to the directors, through (say) declared dividends via the directors loan account. This wouldn't be money put in, it would be money to be taken out generated through profits. Or it could be a bank loan, or many other things. You'd need to do due diligence on it to find out what it is.

For a micro-entity, internally generated intangibles (including goodwill) aren't shown in the accounts and are expensed as incurred.

 

[STDFR33]

Just to note, what the sellers paid for it 18 months ago may or may not resemble what it is worth today.

Don't proceed with purchasing on the basis of what the sellers paid.

 

[chasdad]

There was a small profit in year 1 and this was then paid out as a dividend after corporation tax deducted from the initial profit. I'll ask the agent about the creditor.

This is a micro entity sales around £100k, the question I have is regarding their supposed purchased goodwill of £13k. This obviously isn't internally generated but was part of the original purchase price (£20k). As a micro-entity it can't be shown as an asset and amortised over 5 years?

 

[chasdad]

Absolutely, having spoken to the owners directly, I'm trying to assess their integrity as what they are saying isn't represented in their accounts. However, if purchased goodwill can't be shown as an asset in their balance sheet then they may be being honest. If that makes sense?

Just to note, what the sellers paid for it 18 months ago may or may not resemble what it is worth today.

Don't proceed with purchasing on the basis of what the sellers paid.

 

[@aiteoconsulting]

No, that goodwill wouldn't feature in the acquired company's accounts, only the acquiror company (if there was one). But they probably acquired the company as individuals, rather than a company, given you appear to be planning to buy the shares directly from them.

 

[DontAsk]

It's only worth (to you) what you are prepared to pay, regardless of how the figure is arrived at. It's perceived worth to the sellers will probably be somewhere north of that.