Quick answer
Goodwill is the value of a business beyond its identifiable assets: its reputation, customer base, location, staff, systems and brand. When a business is sold, goodwill is usually the gap between the purchase price and the fair value of the tangible and other identifiable assets. Lenders rarely lend against goodwill alone, because it has little resale value if the business stops trading.
Key points
- Goodwill is an intangible asset and usually the largest part of a small business's sale price
- Most lenders exclude goodwill when they work out how much security a business offers
- Buyers usually fund goodwill with property equity, cash flow lending or vendor finance
- For tax, goodwill is a capital gains tax asset and can qualify as an active asset for small business concessions
Picture a suburban bakery listed for $320k. The ovens, display cabinets and fit-out might fetch $70k if sold off at auction, and the flour and packaging on hand another $5k. So why would anyone pay $320k? Because the bakery comes with a queue out the door every Saturday, a wholesale contract with three cafés and a name locals trust. That extra $245k is goodwill.
What goodwill is made of
business.gov.au describes goodwill as an intangible asset reflecting a business’s reputation. In practice it bundles together several things a buyer hopes will keep producing profit:
- loyal, repeat customers and the habit of coming back
- a good location, often tied to a lease
- trained staff and working systems
- the brand, phone number, website and online reviews
- supplier relationships and contracts
Some of these transfer cleanly. Others, like the outgoing owner’s personal relationships, can walk out the door at settlement. Good due diligence tries to separate the two.
Why lenders discount goodwill
Lenders look at security from one angle: if the loan goes bad, what can be sold to repay it? Equipment has a resale market and property has a valuation. Goodwill only has value while the business keeps trading successfully, which is precisely the scenario in which the lender wouldn’t need to sell anything.
So when a lender assesses a business acquisition loan, it typically:
- Gives the tangible assets a conservative value.
- Gives goodwill little or nothing as security.
- Leans on the business’s track record of profit to judge whether repayments are affordable.
- Asks for additional security, often residential or commercial property, to cover the gap.
Many lenders also strip goodwill and other intangibles out when they calculate a borrower’s net worth from the balance sheet. A company showing healthy equity can look far thinner once purchased goodwill is removed.
If you’re buying a business and the numbers lean heavily on goodwill, tell us about the deal and we’ll work through which structures suit it.
How buyers usually fund the goodwill portion
Using the bakery above, a buyer with $80k cash needs about $240k more, almost all of it goodwill. Realistic routes include:
| Option | How it handles goodwill |
|---|---|
| Loan secured by home equity | Property covers the shortfall; the bank or lender looks past goodwill |
| Cash flow-based acquisition loan | Lender relies on proven profits, usually with a GSA and guarantees |
| Vendor finance | Seller carries part of the price, which also signals confidence in the goodwill |
| Mix of the above | Common for purchases where the seller wants most of the money at settlement |
Banks are often the cheapest source here when the buyer has property and solid experience in the industry, and their offers deserve close attention. Where a bank declines because the deal is too goodwill-heavy, non-bank and private lenders secured over property can often still fund it. See funding for buying a business for a fuller comparison.
Goodwill and tax in Australia
Goodwill is a capital gains tax asset. It isn’t depreciated for tax, so a buyer can’t write it off over time. When the business is later sold, goodwill is often treated as an active asset, which means the small business CGT concessions may reduce or remove the gain if the seller meets the eligibility tests. The ATO’s guidance on capital gains tax for business assets sets these out, and an accountant should handle the allocation of the sale price between goodwill and other assets.
Related terms
Asset, equity, net worth, EBITDA and add-backs all feed into how a business, and its goodwill, gets valued.
Buying a business where most of the price is goodwill?
That’s normal, and it simply changes which lenders and security make sense. Share the deal with us and we’ll map out the realistic options. It’s about a minute’s work, and asking us leaves your credit history exactly as it was. Nobody hands your file to a panel of funders; one specialist reads it and phones you back. Give the asking price, your available cash and details of any property honestly and precisely, which makes that first phone call genuinely productive.
Frequently asked questions
Can I get a business loan secured by goodwill?
It's uncommon. Goodwill can't be repossessed and resold like equipment or property, so most lenders give it little or no security value. Some lenders will fund part of a purchase based on the business's proven cash flow, usually with a GSA and personal guarantees, but property security is often needed for larger amounts.
How is goodwill worked out when buying a business?
Take the agreed price, subtract the value of the equipment, fit-out, stock and other identifiable assets, and what's left is goodwill. The price itself usually comes from a multiple of the business's adjusted profit, so goodwill reflects how reliable those profits look.
Does goodwill appear on my balance sheet?
Only if you bought it. Goodwill paid for when acquiring a business is recorded as an asset. Goodwill you've built yourself over years of trading generally isn't recorded, even though a buyer might pay for it.
Can I claim a tax deduction for goodwill?
Generally no. Goodwill isn't depreciated for tax purposes in Australia. It's treated as a capital gains tax asset instead, so the cost becomes relevant when you sell the business. Your accountant can confirm how it applies to you.
What can make goodwill disappear?
Losing a key staff member or the owner's personal relationships, a lease that isn't renewed, a major customer leaving, poor reviews or a new competitor nearby. That fragility is exactly why lenders discount it.