What Is Goodwill in a Business Sale?

Definition, Valuation, and Why It Matters

When selling or buying a business, one term that often sparks debate is goodwill. It’s a concept that sits at the heart of business valuation but is often misunderstood. At Christie & Co, we help clients across sectors navigate the complexities of business sales, and goodwill is one of the most important elements to get right.

What Is Goodwill?

Goodwill is the element of a business which relates to intangible assets. These include:

• Market segment
• Brand name and reputation
• Physical attributes of the business premises
• Customer loyalty
• Staff expertise and consistency/length of service
• Operational systems
• Location
• Digital presence and marketing assets
• Strategy and business growth plan

All of the above are important factors in the financial performance of the business which drives the turnover and profit of the business. From this, the value of the goodwill can be determined.

When a business is valued or sold, reference is often made to a ‘going concern’. This essentially means a trading business, which can trade from leased or owned premises. In the case of leased premises, the value of the business will be derived from the goodwill and fixtures and fittings, plus any value attributed to the balance of the lease. Where the business premises is owned, the freehold will have a separate value based on various factors and subject to prevailing market conditions.

In short, goodwill is what makes a business worth more than just the sum of its parts. It’s the trust, recognition, and relationships that have been built over time.

Why Does Goodwill Matter in a Business Sale?

As already explained, Goodwill plays a central role in the valuation and/or sale of a ‘going concern’. A professionally qualified and experienced Valuer will consider the generic and sector specific characteristics of the business and carefully analyse its trading (profit and loss) accounts to calculate the value of the goodwill.

In the case of a sale, the business would then normally be professionally marketed and interest/offers invited from a number of parties. Where a leasehold going concern is being sold, the buyer will acquire the goodwill, fixtures and fittings. A freehold/long leasehold going concern means that the business premises are also being sold.

As in any negotiation, the buyer will have a view as to the potential of the potential of the business and sometimes will offer a premium price for a business which ‘ticks all the boxes’ in terms of current trading performance and future potential.

Goodwill can represent a substantial portion of the sale price. For example:

• In healthcare, it might reflect patient retention, NHS contracts, or clinical reputation.
• In hospitality, it could be tied to online reviews, repeat customers, or staff quality.
• In childcare, it may hinge on Ofsted ratings, occupancy levels, and parental trust.

Tangible vs. Intangible Goodwill: The “Cat vs. Dog” Analogy

A helpful way to understand goodwill is through the metaphor of “cat” and “dog” goodwill:

• Dog goodwill is loyal to the owner. Think of a dental practice where patients come specifically for the named principal. If that person leaves, the goodwill may leave with them. Or an eponymous restaurant, where the owner is a high-profile chef who offers a style of cuisine which is highly personal and very difficult for a new owner to replicate.
• Cat goodwill is more independent. For example, a branded hotel where customers are loyal to the brand or location, not the individual owner. Customers are unlikely to leave if there is a change of ownership

This distinction matters because it affects risk and transferability. Buyers are more cautious with dog goodwill, as a change of ownership (where the previous owner exits) may well lead to a short-term drop-in business.

Sector-Specific Valuation Multiples

Goodwill is often valued using multiples of profit (EBITDA). These multiples vary by sector and are influenced by:

• Market sentiment and supply/demand dynamics
• Location
• Asset quality
• Regulatory environment
• Security of income
• Trading history and current/near future performance

The future security of income is crucial in determining the multiples which are applied to determine value. For example, ‘needs driven’ sectors such as Pharmacy, Dentistry, Childcare and Healthcare generally achieve higher multiples that the Hospitality sectors where customer demand is more volatile.

How to Maximise Goodwill Before a Sale

If you’re preparing to sell, here are some ways to enhance your business’s goodwill:

• Strengthen customer relationships
• Invest in staff training and retention
• Improve your online visibility (SEO, reviews, social media)
• Document operational processes
• Maintain compliance and certifications

How Christie & Co Can Help

Valuing goodwill accurately requires sector expertise and market insight. At Christie & Co, we understand the nuances of each industry and can help you assess the full value of your business, including its intangible assets.

Final Thoughts

Goodwill is more than just a line on a balance sheet; it’s the heart of what makes a business valuable. Whether you’re buying or selling, understanding goodwill is key to making informed, confident decisions.