Key Takeaways
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Goodwill is the part of the price that pays for the earning capacity of the business beyond its physical assets.
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Goodwill that sits with the business can transfer, while goodwill that sits with the owner may not.
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The sale contract apportions the price between goodwill, plant and equipment, and stock, and each party may prefer a different split.
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Goodwill is only delivered when the lease, name, systems, staff and customer relationships move across at settlement.
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The tax treatment of goodwill depends on structure and eligibility, so an accountant should be involved before the contract is signed.
Part of the price paid for an established business is usually for something other than the fit-out and equipment. It covers the customers who come back, the staff who know the routine, the supplier terms, the reviews and the lease that holds it all in place.
In a business sale, that value is called goodwill. Selling it involves three tasks: understanding how it is assessed, recording it correctly in the contract and protecting it through to settlement. A confidential business appraisal can show how much of an asking price is goodwill before the business goes to market.
Goodwill can make up a large part of the price, which is why buyers comparing a business for sale on the Gold Coast look closely at what supports it. A broker to sell your business can help present the records behind the figure so it holds up when buyers test it.
What Goodwill Means
Goodwill is the difference between what a buyer pays for a business and the value of the identifiable assets they receive. Those assets include plant and equipment, fit-out, vehicles and stock. Everything else that makes the business worth more than that list is goodwill.
Gold Coast business brokers tend to describe it in practical terms. It covers regular customers, a known name, trained staff, documented systems, supplier relationships and a trading position a buyer could not easily replicate from scratch.
Some intangible items can be identified and transferred separately, such as a registered business name, a trade mark, a domain name or a customer database. They sit alongside goodwill, not inside it, and the contract should say which of them transfer.
Types of Goodwill
Goodwill generally falls into two types, and buyers treat each one differently:
Business Goodwill
Business goodwill attaches to the business itself and can survive a change of owner. It is built from things a buyer can see and keep:
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A customer base that returns because of the product, location or service, not because of who serves them.
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A secure lease with usable term and options in a position that suits the trade.
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Staff who stay and know how the business runs.
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Written procedures, recipes, pricing and supplier arrangements.
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A name, reviews and online presence that bring in new customers without the owner's involvement.
Personal Goodwill
Personal goodwill attaches to the owner. It covers customers who come for the owner's skill or relationship, suppliers who deal on the owner's word, and knowledge that lives only in the owner's head.
Buyers may discount personal goodwill because it may leave when the owner does. A seller can convert some of it into business goodwill before listing by documenting procedures, introducing key customers to staff and stepping back from the front counter.
How Goodwill Is Assessed
Goodwill is not usually valued on its own. A broker or valuer first forms a view of what the whole business is worth, generally by assessing maintainable earnings after adjustments that can increase or reduce profit, then weighing the risks a buyer takes on. Goodwill is what remains after the identifiable assets are deducted from that figure.
Two businesses with the same equipment can carry very different goodwill. The one with stronger earnings, a longer lease and less dependence on the owner is likely to carry more. An appraisal that sets out how the figure was reached lets a seller see which drivers support the price and which are holding it back.
How the Price Is Split
A business sale contract generally states one total price and then apportions it between goodwill, plant and equipment, and stock. Stock is often counted at settlement and adjusted separately.
The split matters because each component can be treated differently for tax. A buyer may prefer more of the price attributed to plant and equipment, because that can affect the deductions available to them afterwards. A seller may prefer more attributed to goodwill, because a gain on goodwill may be treated as a capital gain and may qualify for concessions, depending on their circumstances.
The apportionment should be realistic and supported. An equipment figure far above what the items would fetch, or a goodwill figure that bears no relation to earnings, can be questioned later. Agree the split with your accountant before the contract is drawn. Have your solicitor check that the contract records it the way you intend, along with the other sale contract terms.
What Transfers With Goodwill
Goodwill on paper is only worth what arrives on settlement day. The contract and the settlement checklist should cover each item that carries it:
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The registered business name and any trade marks.
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Domain names, website, email accounts, social media accounts and online review listings, including administrator access.
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Phone numbers and directory listings.
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Customer records, handled in line with any privacy obligations that apply.
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Recipes, procedures, supplier contacts and pricing files.
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The lease, by assignment or a new lease with the landlord's consent.
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Licences and permits that can be transferred, with time allowed for each regulator's process, such as transferring a liquor licence.
Identify early anything on this list that cannot be transferred or that the seller intends to keep, so the buyer can price accordingly. Do not assume customer data can be handed over freely; confirm the position with a privacy adviser.
Protecting Goodwill Before Settlement
Goodwill can erode between signing and settlement if trading slips, staff leave or customers hear the wrong story. Sellers protect it by keeping the business running as normal, maintaining stock and opening hours, and managing the timing of announcements to staff, suppliers and customers.
Buyers protect it through the contract. Common tools include a restraint of trade that limits the seller from competing nearby for a period, a handover and training obligation, and warranties that trading and staffing have not materially changed. Restraints generally need to be reasonable to be enforceable, so set the area and duration with a solicitor, not by copying them from another deal.
A planned handover can carry relationships across in a way the paperwork cannot. It means introducing the buyer to regular customers, suppliers and the landlord, and working alongside them for an agreed period.
How Goodwill Is Taxed
For a seller, the amount received for goodwill is generally dealt with under capital gains tax (CGT) rules. Small business CGT concessions may reduce the gain if the eligibility conditions are met.
Goods and services tax (GST) may or may not apply to the sale, depending on whether it qualifies as a supply of a going concern. In Queensland, the Queensland Revenue Office treats goodwill as a business asset for transfer duty, so its inclusion may make the transfer dutiable.
Each of these outcomes depends on the structure of the sale, who the seller is and how the contract is drafted. Confirm the position with an accountant and solicitor before signing, not after.
Document What Transfers
List every item that carries your goodwill and confirm which can be transferred and how. Then settle the apportionment with your accountant before the contract is drawn.
Bond Business Brokers can assess the goodwill in your business as part of an appraisal.
Common Questions
Can I keep some customers after selling the business?
Generally not without the buyer's agreement, because the contract and any restraint of trade usually stop the seller dealing with the customers the goodwill relates to. Any customers or contracts you plan to keep should be carved out in writing before signing, with your solicitor's advice.
Can goodwill be sold separately from the business?
Generally not. Goodwill exists alongside the things that generate it, such as the premises, the name, the staff and the systems, so a buyer who cannot take those over is unlikely to pay for it. Your solicitor can confirm how the contract ties them together.
Does a short remaining lease reduce goodwill?
It can, where the business depends on its location, because a lease with little term and no options puts that trade at risk. Speaking to the landlord about a new lease or further options before listing may help, with a solicitor reviewing the terms.
This article provides general information only. Obtain advice from appropriately qualified advisers about your circumstances before entering into a transaction or relying on tax, legal or regulatory information.