Goodwill
The intangible value of a business that exceeds the value of its net tangible assets. Represents the customer base, reputation, processes, relationships, and competitive advantages not recorded on the balance sheet.
Definition
Goodwill is the difference between the price paid for a business and the value of its net tangible assets. It represents everything that makes the business valuable beyond its physical property.
In French-language Quebec documentation, you’ll see achalandage used for the same concept.
For example, if a business is bought for $3 million and its net assets are worth $1.2 million, goodwill is $1.8 million.
Why goodwill matters in a sale
For most services and technology SMEs, goodwill represents the majority of the value. A buyer pays for:
- The existing customer base and the recurring revenue it generates
- The reputation and the brand in the market
- The processes and systems that keep the business running
- Key employees and their expertise
- Long-term contracts and supplier relationships
Tax implications
In an asset sale, allocating part of the price to goodwill has distinct tax consequences for the buyer and the seller. The exact treatment depends on the transaction structure, the allocation of price among assets, and the tax rules in force at the time of sale.
What every seller should know
- High goodwill relative to tangible assets is normal and healthy for a services business — it means the value rests on the business itself, not on its physical property
- Buyers analyze the “quality” of goodwill — goodwill backed by recurring contracts and a diversified customer base is stronger than goodwill that depends on the owner’s personal relationships
- Reducing your personal dependence in the business before the sale strengthens goodwill and, therefore, value