Are you compromising the value of your business goodwill?
For people who are considering selling or purchasing a business, understanding what the value of the goodwill of the business is, is important as it impacts on the purchase price or tax considerations of the transaction.
Goodwill takes time and effort to generate and can, in many cases, take the form of the business’ brand and reputation. In this form, goodwill is protected by, amongst other things, the business name.
In the past few weeks, we have been involved in both business sale and business purchase transactions in which the business’ brand and reputation were a key component of the goodwill and accordingly was represented in the purchase price.
However, in these transactions the business owners failed to register the business name. Fortunately, our due diligence uncovered this oversight, the respective business names were available, and the purchase price of the business was not compromised. As you may expect, if you are buying a business, you will want to ensure that the business name under which that business trades is transferred to you, as the name is an essential part of the business’s identity and is a valuable part of what you are buying (because of course the “goodwill” component of the business sale is attached to the name of the business).
But what happens if the business name is not registered?
Both a seller and a buyer run the risk that an unregistered business may not be available when they try to register it and, ultimately, they may not be able to trade under that name at all. Considering the goodwill being sold attaches to the business name, what happens to the value of the business being sold/bought then?
Most parties in this situation are not even aware of the requirement to register a business name. In many cases the seller of a business is a company and the seller has simply used the company name without the “Pty Ltd” in its business activities. If it does that, it must register that name with the Australian Securities and Investments Commission (ASIC). For example, if a company is called Sam’s Roses Pty Ltd and it operates a business under the name “Sam’s Roses” (i.e. without the “Pty Ltd”), then Sam’s Roses Pty Ltd must register the business name “Sam’s Roses” with ASIC.
A company may also operate different businesses under different names, all of which will need to be registered. For example, Sam’s Roses Pty Ltd may operate a rose growing business called “Sam’s Rose Growers” and a retail florist business called “Sam’s Rose Shop”. Sam’s Roses Pty Ltd would therefore need to register both “Sam’s Rose Growers” and “Sam’s Rose Shop” as business names.
If you are a sole trader and you trade under your own name, then you don’t have to register your name as a business name. However, if you use another name (even if it includes your name), you will have to register that business name. For example, if your name is Sam Jones and you operate a business under the name “Sam Jones’ Roses”, then you must register “Sam Jones’ Roses” as a business name with ASIC.
What happens if I have registered a trading name? You may have previously registered a business name under the state/territory legislation. However, on the introduction of the Commonwealth legislation establishing the ASIC Business Names Register on 28 May 2012, that business name (registered under that state/territory legislation) was recorded on the ASIC Business Names Register as a “trading name”. It is not one and the same as an ASIC registered business name.
Before a trading name can be available for transfer as part of the business purchase, the trading name needs to be registered as an ASIC registered business name.
Be aware that, in addition to the risk surrounding unregistered business names in a business sale/purchase transaction, it is also an offence to carry on a business under an unregistered business name and an entity or person may be fined for doing so.
What should you do to protect the value of your business’ goodwill in a business purchase?
- ensure that the business name is registered;
- if the name is a trading name, ensure that it is registered as an ASIC registered business name.