Bill Gladstone has owned and operated Gladstone’s Service Station for over 30 years. The business, which is currently the town’s only service station, has always been extremely profitable. Gladstone recently decided that he wanted to sell the business and retire. His asking price exceeds the fair market value of its net identifiable assets by nearly $50,000. Gladstone attributes this premium to the above-normal returns that the service station has always generated.
Gladstone recently found out about two issues that could have a profound effect upon the future of the business: (1) A well-known service station franchise will be built across the street from his station in approximately 18 months, and (2) one of his underground fuel tanks may have developed a very slow leak.
a. How might these issues affect the $50,000 in goodwill that Gladstone included in his selling price?
b. Assume that Gladstone is not disclosing this information to potential buyers. Does he have an ethical obligation to do so? Defend your answer.