Goodwill Funding: Financing the Intangible Value of a Business

Goodwill is the difference between the total purchase price of a business and the fair market value of its net tangible assets (equipment, stock, fit-out, cash, minus liabilities). It represents the intangible value that makes the business a going concern — the customer base, brand, reputation, supplier relationships, staff expertise, systems, processes, and the established cash flow. For example, if a business sells for $800,000 and its net tangible assets are worth $200,000, the goodwill component is $600,000. In many service-based and professional businesses, goodwill can represent 60-80% or more of the total purchase price, making it the most significant and challenging component to finance.

Lenders use several methods to assess whether the goodwill component of a purchase price is reasonable and fundable. The most common approach is a multiple of maintainable earnings — lenders look at the business's adjusted net profit (normalised for owner benefits, one-off expenses, and non-cash items) and apply a multiple. Industry norms vary, but multiples of 1.5x to 4x maintainable earnings are typical. A cafe might trade at 1.5-2x earnings while a professional services firm with recurring revenue might justify 3-4x. Lenders also consider the debt service coverage ratio (DSCR) — whether the business's cash flow can comfortably service the proposed loan repayments, typically requiring a DSCR of 1.25x or higher. Crucially, lenders want to see that the goodwill value is sustainable — meaning the business will continue to generate similar cash flow under new ownership.

Not all goodwill is created equal, and lenders distinguish between personal goodwill and commercial (or enterprise) goodwill. Personal goodwill is tied to the outgoing owner — their relationships, reputation, and personal skills. If the business relies heavily on the owner's personal presence (a sole practitioner medical practice, a consultant's business, a personal brand), much of the goodwill may leave when they do. This is higher risk for lenders. Commercial goodwill is tied to the business itself — its brand, systems, location, customer contracts, staff, and processes. A business with strong commercial goodwill will continue to perform regardless of who owns it. This is what lenders prefer to fund. The split between personal and commercial goodwill significantly affects fundability. Businesses with high commercial goodwill and low personal goodwill are the easiest to fund. Where personal goodwill is significant, lenders may require a longer transition period, vendor finance, or earn-out structures to manage the risk.

Financing a business with a significant goodwill component requires careful structuring. The ideal approach combines multiple funding sources: a term loan secured against property covers the bulk of the funding at the best rates, asset finance separately funds equipment and vehicles included in the sale, vendor finance or an earn-out covers a portion of the goodwill (reducing lender risk and aligning the seller's interests with business performance), and a working capital facility provides operating funds for the transition period. Where property security is not available, lenders may fund goodwill using a general security agreement over the business, personal guarantees, and cash flow-based assessment — though at higher rates and lower LVRs. The key is presenting a complete picture: a credible purchase price supported by maintainable earnings, a clear post-acquisition plan, and a security structure that gives the lender confidence.

Several common challenges arise when financing goodwill. Overpayment risk — if the purchase price implies an earnings multiple above market norms, lenders may cap the fundable amount. Buyer inexperience — where the buyer lacks industry experience, lenders worry about the business performing differently under new management. Customer concentration — if a large portion of revenue comes from one or two customers, the goodwill is more fragile. Owner dependency — businesses that rely heavily on the outgoing owner's personal relationships pose higher risk. Incomplete financials — lenders need clean, verifiable financial data to assess maintainable earnings. Cash businesses — where a significant portion of revenue is cash-based and may not be fully captured in the accounts, lenders will only fund based on declared income.

Goodwill is easiest to fund when certain conditions are met: the business has a strong track record of consistent earnings over 2-3 or more years, revenue is diversified across many customers with no single customer dominating, the business has systems and processes that operate independently of the owner, there is a reasonable transition period with the outgoing owner, the purchase price reflects a sensible multiple of maintainable earnings for the industry, the buyer has relevant experience or a strong management team, and adequate security (particularly property) is available to support the loan. When these factors align, lenders can comfortably fund 2-4x maintainable earnings in goodwill. Working with a specialist broker who understands how different lenders assess goodwill — and who can present your deal to the right lenders — makes a material difference to both approval rates and the terms you receive.