How is goodwill calculated in a business valuation?
The short answer
Goodwill is a residual, not a separate calculation. Value the business on its earnings, value the net tangible assets at market, and the difference is goodwill. The important question is then how much of that residual is transferable to a buyer, and how much walks out with the owner.
The arithmetic is simple
Total business value on an earnings basis, less the market value of net tangible assets, equals goodwill. If a business is worth $2.2m on a capitalisation of earnings and holds $700,000 of net tangible assets at market, goodwill is $1.5m. There is no separate goodwill formula, and any that is offered should be treated with suspicion.
Transferable versus personal goodwill
This is the question that matters and the one most contested in disputes. Goodwill attached to the business — location, brand, systems, contracts, a trained team, a customer base that books with the business — transfers to a buyer. Goodwill attached to the owner personally — their relationships, reputation, licences and skills — generally does not.
Why the distinction decides real money
In an owner-operated professional or trades business, a large share of what looks like goodwill is personal. A buyer will not pay for relationships that leave when the owner does, and in family law matters the split between personal and transferable goodwill is frequently the largest single item in dispute.
Making goodwill transferable is a project
Documenting processes, putting client relationships on contracts in the company’s name, building a management layer, moving licences to employed staff and shifting the brand from the person to the business all convert personal goodwill into transferable goodwill. It takes twelve to twenty-four months and it is worth doing before you sell.
The numbers
A worked goodwill calculation
The same business, shown twice — once with the goodwill largely transferable and once with it largely personal.
Scroll the table sideways →
| Line | Manager-run business | Owner-run business |
|---|---|---|
| Normalised EBITDA | $600,000 | $600,000 |
| Multiple applied | 3.8× | 2.4× |
| Enterprise value | $2.28m | $1.44m |
| Net tangible assets at market | $700,000 | $700,000 |
| Goodwill (the residual) | $1.58m | $740,000 |
| Of which transferable | Substantially all | A minority — the rest is personal |
Identical earnings and identical assets. The entire difference is whether the goodwill would survive the owner’s departure — which is why owner dependence is the largest single value factor in Australian SME valuation.
Caveats
What makes goodwill transferable
Each of these converts value that would leave with you into value a buyer can pay for.
Who answered this
Prepared by the valuation team at Business Valuations Brisbane, the business valuation division of Asset Valuations Group. Every report we issue is signed by a Certified Practising Valuer of the Australian Valuers Institute. General information only — not advice on your specific circumstances.
- Contracts in the company’s name A signed agreement between the customer and the business transfers. A handshake with you does not.
- A management layer Someone other than you who can run the business and whom customers already deal with directly.
- Documented systems Pricing, process and know-how written down rather than held in your head. This is also what makes a handover credible.
- Brand separate from the owner Where the business is named after you and known for you, the goodwill is harder to transfer. It can be shifted, but it takes time.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
Last reviewed
Find out how much of your goodwill would actually sell.
A free 15-minute call answers it for your business specifically. No obligation, and a fixed fee in writing if you go ahead.
1300 778 033