Goodwill in a Business Sale: What It Is and Why It Matters

What is goodwill?

Goodwill is the part of a business’s value that exceeds the total value of its tangible assets. Put more simply: if you bought all of a business’s equipment, inventory and physical assets at market value — and you paid more than that total — the excess is goodwill.

Goodwill represents the things that cannot be seen or measured but still create value: reputation, customer relationships, a good location, the brand, operating know-how, and the “competitive advantage” the business has built.

Why goodwill matters in negotiation

Goodwill is often the biggest point of dispute in a business sale because:

For the seller: Goodwill is “the fruit of years of work” — they want to be paid for the reputation, the loyal customers, and the systems they have built.

For the buyer: Goodwill is an intangible asset with no guarantee on the books — when you buy it you are paying in advance for future income that may not actually arrive.

The reality is that the goodwill of many small businesses is tied to the current owner — customers come because of Mr X, not because of the business. When Mr X leaves, part of the goodwill leaves with him. A smart buyer will discount the value of goodwill in proportion to this dependence.

Types of goodwill

Personal goodwill: Tied to the specific owner — their talent, personal relationships and special skills. High risk for a buyer because it cannot be fully transferred.

Enterprise goodwill: Tied to the business as an entity — the brand, location, systems, processes, and long-term contracts with customers. This type can be transferred and has real value to a buyer.

Location goodwill: Value from the geographic location — passing foot traffic, proximity to a shopping centre, and so on. This only has value if the lease guarantees you can continue to occupy that location.

How goodwill affects due diligence

When buying a business, the goodwill questions to ask are:

• Do customers come for the brand, the location, or the current owner?
• If the owner leaves entirely after a three-month handover, how much of the revenue might be lost?
• Do long-term customer contracts contain a clause allowing cancellation on a change of ownership?
• Is the seller’s non-compete enough to protect you?

The answers to these questions directly affect how much you are willing to pay for goodwill.

Non-compete: protecting the goodwill you have bought

One of the most important clauses when buying a business with high goodwill is the non-compete clause — restricting the seller from opening a competing business in the same industry, in the same area, for a set period.

Without a non-compete, the seller could sell you the business and then open a competing shop the very next day, taking all the old customers with them. The goodwill you just paid for would disappear quickly.

A non-compete must be “reasonable” in scope and duration to be enforceable by a court — one that is too broad may be declared void.

The tax consequences of goodwill

For the seller: Goodwill is usually a CGT asset — selling goodwill creates a capital gain. The Small Business CGT Concessions may apply if you are eligible — see the related guide on capital gains tax when selling a business.

For the buyer: Purchased goodwill usually cannot be depreciated the way tangible equipment is — but the specific tax treatment depends on the deal structure and requires advice from an accountant. This is why a buyer often wants less of the value allocated to goodwill and more to depreciable assets.

Allocating the purchase price between goodwill and other assets is a point of negotiation — it has different tax consequences for the two parties, and it must be declared consistently in the contract and with the ATO.