As an intangible asset, Goodwill appears on the balance sheet and increases the total asset balance. Share It. UNC Press Books, Thomas S. International Franchise Association. Federal Trade Commission. Accessed Sep. Exciting Franchise Opportunities. Start your own nicenstripy franchise. Funding Support Available?
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Companies to Consider. Ableworld Seeking Entrepreneurs. Goodwill is perceived to have an indefinite life as long as the company operates , while other intangible assets have a definite useful life. For a long time, it could be amortized over a period of 40 years. A ruling decreed that goodwill could not be amortized, but must be evaluated annually to determine impairment loss ; this annual valuation process was expensive as well as time-consuming.
Now, as per the alternative FASB rule for private companies expanded in for public companies , goodwill can be amortized on a straight-line basis over a period not to exceed 10 years. The need to test for impairment has decreased; instead, an impairment charge is recorded when some event occurs that signals that the fair value may have gone below the carrying amount. These rules apply to businesses conforming to generally accepted accounting principles GAAP using a full accrual accounting method.
If conditions indicate that the carrying value may not be recoverable, then tests for impairment are performed. Small businesses using cash-basis accounting or modified cash-basis accounting can use the statutory rates set by the Internal Revenue Service IRS. The IRS allows for a year write-off period for the intangibles that have been purchased.
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Nevertheless, the agreements contained an ambiguously-worded provision giving Blockbuster the right to require the franchisee to transfer the leases of the premises to Blockbuster for no consideration upon the agreement "being terminated or expiring for whatever reasons". On its face, the clause allowed Blockbuster to require the franchisee to transfer the leases even when no event of default had occurred under the agreement.
Yet in the court's view, despite the wording of the clause, considerations of goodwill militated against this construction:. These facts suggest that it was most unlikely that reasonable people in the position of these parties would have intended to agree that, in circumstances where [the franchisee] was not in default under the agreements, [the franchisee] would have to transfer its leases to Blockbuster, and thereby transfer to Blockbuster the associated, valuable goodwill, for no return to [the franchisee].
Although conflicting drafting elsewhere in the franchise agreement assisted the court in reaching its decision, the court was willing to read down the express terms of the franchise agreement to find in favour of the franchisee. The franchise agreements also restrained the franchisee from carrying on any rival business for a period of up to three years within a radius of 30km of any Blockbuster outlet in Australia.
However, again the court was not willing to give effect to the restraint of trade provision. The court found that Blockbuster had no legitimate interest in the precise locations of the stores. The franchisee held the leasehold interests in the premises, so Blockbuster had no goodwill in their location. Accordingly it had built up substantial goodwill of its own. The court also considered that confidential information was sufficiently protected under the franchise agreements by other means e.
As the Blockbuster case demonstrates, courts may be reluctant to give full force to provisions in a franchise agreement designed to protect the franchisor's goodwill interest, even when the wording is clearly expressed, if to do so would be unduly detrimental to an experienced and already-established franchisee.
The cases discussed in this paper show that goodwill can be a contentious issue at the end of a franchise relationship. Key points for franchisors to bear in mind are:. Goodwill in franchising is a difficult issue, but with appropriate drafting franchisors may be better able to protect the goodwill in their franchise systems. Franchisors will have to accept, however, that there are limits to how much goodwill they can retain after the expiry of the franchise term.
In the meantime, we will be sure to keep you informed about the results of the Review, which, while mainly limited to reviewing specific Code amendments, will hopefully contribute to the ongoing debate about goodwill in the franchising context. The assistance of Ryan Doherty, Graduate, of Addisons in the preparation of this article is noted and greatly appreciated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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