Definition
Goodwill is the part of a business's sale price above the value of its identifiable assets, such as equipment and stock. It reflects things like reputation, customer relationships, location and expected future profits. Because goodwill cannot be sold separately if the business fails, many lenders will not lend against it alone and want other security or a larger buyer contribution.
When you buy an established business, you rarely pay just for the equipment and stock. The rest of the price is goodwill.
Why it matters for finance
Lenders like security they can sell. Equipment, vehicles and property qualify; goodwill does not. That is why acquisition lending often depends on property security, the buyer’s own contribution, or vendor finance where the outgoing owner agrees to be paid some of the price in instalments.
Check what you are paying for
Due diligence should test whether the profits supporting the goodwill are real and transferable. Look at customer concentration, key staff, lease terms and whether the seller’s personal relationships drive the revenue. business.gov.au has a checklist for buying an existing business, and our guide to due diligence and finance covers the lender’s view.
Structure the deal
Separating the price into assets, stock and goodwill helps lenders see what is securable. Ask your accountant how the split affects tax.
If you are buying a business, our business acquisition loans review explains the options, or make one enquiry.
Common questions
Can I borrow to pay for goodwill?
Sometimes, but lenders usually want property security, a strong deposit or a track record. Vendor finance can also help.
How is goodwill valued?
Usually by reference to the business's maintainable profits and a multiple, though methods vary. An independent accountant or valuer can help.
Why is goodwill risky for lenders?
If the business struggles, goodwill can disappear, leaving little to recover. Physical assets can be sold; goodwill generally cannot.
Sources and further reading
Related terms