How is goodwill valued in a small business?

Goodwill is what is left after the assets are counted

Goodwill is the part of a business's value that comes from its ability to keep earning: its customers, reputation, staff, systems, location and supplier relationships. You cannot put it on a trolley, so it is usually worked out as a residual. A valuer usually works it out in three steps.

1. 01Value the whole businessEstimate the earnings the business can reasonably keep making, after removing one-off and private items and allowing a fair wage for the work the owner does, then convert those earnings into a value using a method that suits the business and its risks.
2. 02Value the identifiable assetsEquipment, fit-out, vehicles, stock and any other assets that would go with the business are valued separately.
3. 03Take one from the otherThe difference is goodwill. If the business is worth no more than its assets, there is no goodwill to value.

Personal goodwill and goodwill a buyer can take over

Not all goodwill can be sold. Some belongs to the business and some sits with the owner as a person. A practice with a strong booking system, several practitioners and a long lease has goodwill a new owner can step into. A consultant whose clients come only for them may have little goodwill that would survive their leaving.

So the valuer asks what would stay if the owner walked out tomorrow. The usual signs of goodwill that transfers are:

• repeat customers or written contracts that are not tied to the owner personally
• trained staff who would stay
• documented systems, so the work does not depend on one person's memory
• a secure lease, a known brand and an online presence the business controls

A handover period can help some personal goodwill move to a buyer, but it may not move all of it. If the valuation is for a family law property settlement, it is prepared through our dedicated family law practice, Family Law Valuations.

Where goodwill sits for tax, including 30 June 2027

For capital gains tax (CGT), goodwill is a CGT asset in its own right. Who owns it depends on how the business is run. Where a sole trader, a partnership or a trust carries on the business directly, the goodwill belongs to them, and it may be one of the assets covered by the 30 June 2027 transitional rule for individuals and trusts.

Where a company runs the business, the goodwill belongs to the company. Shareholders who are individuals or trusts may find a value for their shares useful instead, and that share value reflects the company's goodwill. A draft apportioning method (not yet made) may not suit an asset with no purchase price, such as goodwill you built yourself. Whether you need a valuation, or can use another permitted method, is a question for your tax adviser.

Getting goodwill valued

Because goodwill is usually the residual, Independent Business Valuation values it as part of a full valuation of the business, not as a guess on its own. The report shows the business value, the identifiable assets and the goodwill that remains, with the reasoning for each, and a suitably qualified business valuer at Valuo makes every judgement.