Goodwill: what it means for business borrowing

Goodwill is the value of a business over and above its identifiable net assets. It reflects things that are hard to separate and sell on their own, such as reputation, recurring customers, a trained team, contracts and a good location. It only appears in a company's accounts when a business is bought.

01An example

A buyer pays £900,000 for an accountancy practice. Its identifiable assets (office equipment, work in progress and fees owed by clients) less its liabilities come to £150,000. The other £750,000 is goodwill: the price of the client list and the profit it is expected to keep producing.

02Goodwill in the accounts

Purchased goodwill is recorded as an intangible asset on the buyer's balance sheet and, under UK accounting standards for most private companies, amortised over its useful life. Goodwill a business builds itself is not recorded. When an owner sells, the gain on goodwill may qualify for Business Asset Disposal Relief if the conditions are met.

03How goodwill affects borrowing

• Goodwill is not security a lender can sell easily, so goodwill loans are lent against the profits the business makes, often with a personal guarantee or a charge over the business.
• Professional practices (dental, veterinary, pharmacy, accountancy, legal) are where goodwill lending is most established, because their income is steady and well evidenced.
• Lenders often fund a share of the goodwill and expect the buyer to put in the rest, sometimes with deferred payments to the seller.

See goodwill finance for practice purchases, or acquisition finance for other businesses. We search the market for lenders that fund goodwill in your sector. Any broker fee depends on the lender, with nothing to pay upfront.

04Related terms

• EBITDA
• Deferred consideration and earn-out
• Heads of terms

05Sources

• GOV.UK: Business Asset Disposal Relief
• GOV.UK: transfer of a business as a going concern (VAT Notice 700/9)