What Is Goodwill, and How Does It Affect Your Business's Price?

When buyer and seller negotiate price in a business sale, the word "goodwill" comes up sooner or later. It's one of the most used — and most misunderstood — terms in a business deal. Here's what goodwill actually covers, and why it's often the hardest part of the price to agree on.

Short answer: Goodwill is the part of a business's value not directly reflected in the accounts — brand, customer relationships and reputation — and it's often the most negotiated part of the price, because it can't be objectively calculated. Want the full walkthrough of tax, depreciation and the new 2025 rules for goodwill between related parties? Read our full guide to goodwill in a business sale.

What is goodwill?

Goodwill is the part of a business's value that doesn't show up directly in the accounts, but still has real value for a buyer. It typically covers things like an established brand, steady customer relationships, a good industry reputation, trained know-how, a well-run workplace with low staff turnover — in short, everything that makes the business worth more than the sum of its physical assets.

How does goodwill factor into the price?

In practice, goodwill arises as the difference between two numbers: the business's asset-based value (the book value of assets minus debt — essentially what the business is "really worth" if everything were sold off separately) and the price buyer and seller actually agree on. If the agreed price is higher than the asset-based value, the difference represents goodwill — the value of what isn't in the accounts, but which the buyer is willing to pay for anyway.

Why is goodwill the most negotiated part of the price?

Unlike a machine or a bank balance, goodwill can't be objectively measured. Two parties can easily agree on the accounting figures and still be far apart on price, because they assess goodwill differently. A seller who's spent years building a brand and customer base often experiences that value as very real and tangible. A buyer, instead, looks at how certain it is that the customers and reputation actually come along after a change of ownership — and prices the uncertainty in as a discount on the goodwill.

What affects the size of goodwill?

• How dependent the business is on the current owner. Are customer relationships tied to the owner personally, or to the business as a whole? The more personal the dependency, the more uncertain — and thus lower — the goodwill is typically assessed.
• Stability of earnings. A business with steady, predictable earnings over several years typically has more robust goodwill than one that fluctuates a lot year to year.
• Composition of the customer base. Many, spread-out customers generally give more solid goodwill than dependency on a few large customers.
• The nature of the industry. Some industries traditionally have a high goodwill share of the price (e.g. advisory and services), while others are priced more based on physical assets.

How do you use this as a seller of your business?

If you can document why your goodwill is robust — long customer tenure, multiple legs to stand on, a brand known independent of yourself — you're in a stronger negotiating position. If you can't, you should be prepared for a buyer to apply a significant discount precisely to that part of the price, because it's the most uncertain.

Frequently asked questions

Can goodwill be calculated precisely?

No, goodwill is by definition the part of the value that can't be directly calculated in the accounts. In practice, it's set as the difference between the asset-based value and the price the parties agree on — so it's always partly a matter of negotiation.

Why do buyer and seller often assess goodwill differently?

Because the seller typically looks at the historical effort behind it — while the buyer looks forward and assesses how certain it is that customer relationships, reputation and earnings actually come along after a change of ownership.

Can goodwill be the whole reason a deal falls through?

Yes, it's one of the most common reasons parties can't agree — because, unlike physical assets, goodwill can't be objectively verified, and therefore easily becomes the point where negotiations get stuck.

Want to understand what your business is actually worth — including goodwill? Read about business valuation, or use our guide to calculating your business's value.