Is Goodwill permissible?

Is Goodwill permissible?

Answer:

 In the Name of Allah, the Most Gracious, the Most Merciful.

 As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Goodwill is seen as an intangible asset on the balance sheet because it is not a physical asset such as buildings and equipment. Goodwill includes assets with value that are exceptionally difficult to quantify. It typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology.

Goodwill helps a company remain competitive in the long term, even if the company does not produce the best product. For example, a customer will be more likely to buy peanut butter from one company and pay more for it, if he/she thinks the company produces better-tasting peanut butter, regardless of whether or not this is the case. When a company buys another company, it will often pay above the target company’s book value to account for Goodwill.[1]

Goodwill is not considered to be valid article of trade in Sharī’ah.  Therefore, it will not be permissible to charge any amount for Goodwill.[2]

As an alternative, a businessman can inflate the price of his business to incorporate the amount of Goodwill he would have received.  For example, a business is worth £40,000 and the Goodwill is worth £10,000.  It is not permissible to charge £10,000 for the Goodwill.  So instead of making a £10,000 loss, the businessman should sell his business for a total £50,000 without making any reference to Goodwill.  In this way, the sum total of £50,000 will be equated wholly to the business.  As a result, it will be permissible for him to receive the total of £50,000.

And Allah Ta’āla Knows Best

Mawlana Faraz ibn Adam

www.darulfiqh.com