Goodwill

The residual value of a business purchase left over once tangible assets are valued and liabilities assumed are subtracted, representing customer relationships, reputation and other intangible value expected to transfer to the new owner.

Example

A 364,000 purchase price with 100,000 of tangible assets and 10,000 allocated to a non-compete leaves 254,000 allocated to goodwill.

Important

Goodwill is the portion of a purchase price most exposed to key-person risk, since it has no physical form to fall back on if customer relationships do not transfer.

Related terms

• Key-Person Risk — The risk that a business's earnings depend heavily on one specific individual's relationships, judgement or reputation, and will not survive their departure intact.
• Asset Purchase — A business acquisition structured as the purchase of specific named assets and goodwill, rather than the legal entity itself, generally leaving known and unknown liabilities of the old entity behind with limited exceptions.
• Capital gain — The profit made by selling an asset for more than it cost, as distinct from the income the asset paid you while you held it.

Lessons that explain it

• Buying a small business almost always means buying a job — A small-business purchase is rarely a passive claim on cash flow. Most of what you are paying for is bound up with the seller's own labour, and the legal structure of the deal decides which liabilities move with it. (9 min)
• Franchise royalties and goodwill amortisation both compound quietly over the holding period — Beyond key-person and concentration risk, a small-business purchase carries recurring costs and tax treatment that materially change the price a buyer can justify and the return a seller actually keeps - none of which shows up in a headline SDE multiple. This lesson is general information, not personal tax or legal advice, and rules vary by jurisdiction. (12 min)

All 578 terms in the Investing glossary