Charging for Goodwill

27 Feb 2018 Ref-No#: 421

Assalamu alaykum,

A, B, C, D and E are joint partners in a running business concern. A and B own shares of 25% each; whilst C and D own 20% each. The remaining 10% is owned by E. D and E are now negotiating to purchase the shares of A and C. The stock, debtors, equipment and other assets have been calculated and after deducting the amounts still owing by the business, D and E have arrived at the net value of the shares of A and C and made an offer to purchase their shares based on those calculations. A and C however, are apparently demanding that goodwill or “key money” be added on to the selling price of their shares, this extra goodwill amount being in lieu of the business name having been firmly established and having built a good reputation. Is this permissible?

Answer

Wa’alaykum as Salam wa rahmatullahi wa barakatuhu,

According to the particulars furnished by you, A, B, C, D and E are joint partners in a running business concern. A and B own shares of 25% each; whilst C and D own 20% each. The remaining 10% is owned by E. D and E are now negotiating to purchase the shares of A and C. The stock, debtors, equipment and other assets have been calculated and after deducting the amounts still owing by the business, D and E have arrived at the net value of the shares of A and C and made an offer to purchase their shares based on those calculations. A and C however, are apparently demanding that goodwill or “key money” be added on to the selling price of their shares, this extra goodwill amount being in lieu of the business name having been firmly established and having built a good reputation.

As far as this aspect of goodwill is concerned which A and C are claiming over and above the selling price of their shares would not be permitted in terms of Shar’ie Law. Once a selling price is agreed upon between a buyer and seller, that is what the buyer will be obliged to pay. To stipulate a further goodwill amount merely for the established name of the business and making that a condition for the consummation of the business transaction would not be permitted as such a condition favours the seller and would thus render the sale corrupt. The trend of asking for goodwill has been condemned and prohibited in the Kitaabs of many prominent Muftis such as in Fataawa Mahmudiyya (Vol. 13, Pg. 397); Faataawa Rahimiyyah (Vol. 3, Pg. 223) and Aap Ke Masaa’il (Vol. 6, Pg. 138).

However, as the deal between D and E (in their capacity as purchasers) and A and C (in their capacity as the sellers) is a transaction of sale, A and C have the right to dictate their price for the sale of their shares. It follows then that they have the right to inflate the price of the sale of their share/s over and above its net value and consider that inflated amount as the selling price of their shares. Hence, if without making mention of any goodwill, they inflate the selling price to an amount that equals or even exceeds the amount that they expected together with the goodwill, it would be permissible; because the whole amount would be considered to be the selling price. On the other hand, if they break up the asking price saying that X amount is the selling price and Z amount is the goodwill, then it would not be permissible. In short, the method of approaching the transaction will make all the difference between its permissibility and impermissibility.

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