Goodwill amortization with full seller financing

April 17, 2024

by a searcher from University of Pennsylvania - The Wharton School in Pittsburgh, PA, USA

Getting conflicting opinions. If sellers step in and finances the bank loan portion of the deal through an installment loan/sale, can I still amortize the full amount of the purchase price as goodwill? One accountant says no, because sellers are not getting paid a lump sum, but rather in installments over time. As such, I can only amortize 1/15th of the principal payments as I make them, plus 1/15th of any new equity injection at deal close. Another accountant says I can amortize full purchase price b/c it is a liability in full on the BS Its an equity sale (not asset sale) and the seller loan is standard, with PG.

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Reply by a professional
from West Chester University of Pennsylvania in Cochranville, PA 19330, USA

Goodwill typically arises in the context of business acquisitions when the purchase price exceeds the fair value of identifiable assets acquired, less liabilities assumed. It's then recognized as an intangible asset on the balance sheet and subject to amortization over its useful life. In the case of seller financing, where the seller provides financing for a portion of the purchase price, the treatment of goodwill amortization may be affected.

If the seller financing is structured as an installment sale, where payments are made over time, the installment method may apply. Under the installment method, only a portion of the principal payments would be recognized as revenue over the term of the financing agreement, rather than the full purchase price.

Therefore, it's likely that the first accountant's interpretation is correct, and you would amortize only a portion of the purchase price as goodwill, reflecting the actual cash payments made to the seller over time. However, it's important to consult with a qualified accountant or financial advisor familiar with the specifics of your transaction and applicable accounting standards for precise guidance.

Reply by a professional
from Florida State University in Fort Lauderdale, FL, USA

As Benn Wann Highlighted above, Goodwill arises only when the purchase price exceeds fair value. When you are amortizing this for tax purposes (which is what I assume you are concerned with) you must explicitly elect section 197 goodwill amortization. When you do this, you will amortize goodwill over a 15-year period, beginning with the month when goodwill was acquired. If you thought that there was some form of accelerated amortization akin to accelerated depreciation, this is not available to you. You must do 1/15th each year over the course of 15 years. Additionally, remember this is only available when there is a significant change in ownership. Please see some helpful links below that can help further elaborate on this topic: https://www.irs.gov/businesses/small-businesses-self-employed/intangibles https://www.taxnotes.com/research/federal/usc26/197

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