Why Goodwill Is An Important Part Of Selling A Business

Goodwill is the intangible value of a business that brings in customers and revenue, such as its reputation, brand and client relationships. Goodwill is a form of property that cannot be separated or sold apart from the business itself. When you sell a business, goodwill is often the largest part of the price, especially for service businesses like accounting or consulting practices where value sits in relationships rather than equipment. You value goodwill yourself or through a professional valuer, and how you present it affects both the sale price and the tax you pay. This article will guide you on maximising your business sale by explaining goodwill and how to value and use it effectively.

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What is Goodwill?

Goodwill is a vital asset that supports a business’s operations and long-term success.

While no clear-cut definition exists, goodwill is legally recognised as a form of intangible personal property. It is inseparable from the business and represents the added value created by the business’s combined assets, reputation and relationships. Goodwill generally falls into three recognised categories:

• local (or site) goodwill, linked to the business’s physical location; 
• personal goodwill, tied to the owner’s skills, reputation, and client relationships; and
• name (or commercial) goodwill, attached to a trading name, brand or trade mark independently of location or the owner’s personal involvement.

Many owners focus on tangible assets like equipment or inventory when selling a business. However, intangible assets, like goodwill, often do more to set what your business is worth. This is particularly true for service-based businesses, such as accounting practices, where relationships, reputation, and client loyalty often drive value. 

Unlike tangible assets like furniture or inventory, goodwill is the non-physical part of what makes a business valuable. Goodwill captures what makes a business work, which is why it often lifts the final sale price.

Examples of Goodwill

Not all of the following aspects will apply to every business sale, but they can include:

• Brand identity: a strong, recognisable brand boosts a business’s reputation and client base;
• Customer network: an established client base with recurring engagements is essential for long-term success, particularly in professional fields such as accounting;
• Customer reputation: positive client experiences lead to referrals and build community standing;
• Growth potential: expected growth in services or expansion of financial offerings helps buyers plan their budgets and forecast revenue; and
• Market reputation: a good industry reputation is critical to maintaining profitability and success.

Why is Goodwill Important?

When selling your business, emphasising goodwill is crucial. It rewards you for the time and effort invested in building client relationships, brand reputation, and a steady stream of recurring revenue. By highlighting these intangible assets, you increase the sale value and reassure buyers of the strong foundation you have built. You can emphasise that they can maintain and grow what you have established. Done well, this makes your business a more attractive buy.

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How Do I Determine Goodwill Value?

Goodwill only has a financial value once you or a professional valuer assigns it. As a business owner, you are often in the best position to assess the factors contributing to the business’ goodwill, particularly as you likely have a strong understanding of your client relationships, reputation and market position.

Engaging a professional valuer is not mandatory, and many small business owners choose to value goodwill themselves to avoid the cost and time involved in a formal valuation. However, a professional valuation can carry more weight with a buyer, particularly for larger or more complex sales, or where the goodwill component is a significant driver of price. 

They will likely review your business records, assess profitability, and evaluate the associated risks to provide a formal valuation. Remember that valuations may vary among professionals, as they use different methods to determine a business’s value.

Issues to Consider When Valuing

If you decide to determine the goodwill of your business yourself, consider factors such as:

• the business’s status and reputation, including its brand name;
• continued use of the business name after the sale;
• intellectual property, such as patents, trademarks, designs, or other unique logos;
• any restraints of trade imposed on the seller;
• retention of key employees after the sale is finalised;
• introduction to customers and transfer of customer lists upon completion;
• the quality of the client base; and
• the ongoing success or profitability of the business.

Goodwill and Capital Gains Tax on a Sale

When you sell a business, the gain on its goodwill is usually subject to capital gains tax. How much tax you pay depends on how you hold the business, how the sale is structured and the CGT concessions and discounts available to you at the time of sale.

Under the current rules, individuals and trusts that have held the business for at least 12 months can generally apply the 50 per cent capital gains tax discount, while companies cannot. Small business sellers may also currently qualify for the small business capital gains tax concessions, which can reduce or defer tax. The rules are strict, so you should confirm your position with your accountant early.

Note that changes to the CGT rules are due to take effect from 1 July 2027, which may affect how these discounts and concessions apply to the sale of goodwill. Because tax treatment depends heavily on your specific circumstances, and the rules are in a period of change, we recommend speaking with your accountant or a tax adviser about your specific situation before agreeing a sale price or structuring a transaction.

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Key Takeaways

Highlighting goodwill can significantly boost your business’s value when preparing to sell. Emphasising client relationships, reputation, and brand identity raises the sale price and offers your buyers a solid foundation. Ensure you value goodwill accurately, either independently or with the support of a professional valuer. Priced and documented well, goodwill makes your business a stronger, more saleable asset.

If you are planning to sell your business and need help understanding goodwill, LegalVision’s experienced business sale lawyers can help. As part of LegalVision membership, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call LegalVision today at 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is goodwill when selling a business?

Goodwill is the intangible value of a business, its reputation, brand, customer relationships and recurring revenue. In Australian law it is property that cannot be sold separately from the business. It often forms a large part of the sale price, particularly for service businesses.

How do you value goodwill in a business sale?

Goodwill has no set value until you or a professional valuer assigns one. Valuers review your records, profitability and risk, and use methods such as an asset, income or multiplier approach. Because the methods differ, valuations can vary between professionals.

Is goodwill taxed when you sell a business?

Yes. Goodwill is a capital gains tax asset, so the gain on it is usually taxed. Individuals and trusts holding the business for at least 12 months can often apply the 50 per cent capital gains tax discount, while companies cannot.

How does a restraint of trade protect goodwill?

A restraint of trade stops the seller from competing with, or soliciting clients from, the business after the sale. This protects the goodwill the buyer has paid for. Courts enforce a restraint only where it is reasonable in scope, area and time.

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