Goodwill is the portion of a purchase price that exceeds the fair value of a business's tangible assets (equipment, inventory) and identifiable intangibles. It represents brand, reputation, trained staff, and recurring customer relationships, the reasons the business earns more than its parts. Most small-business acquisitions are mostly goodwill.
Goodwill in a price
| Component | Amount |
|---|---|
| Equipment & vehicles | $120,000 |
| Inventory | $25,000 |
| Goodwill | $800,000 |
| Total price | $945,000 |
At a 2.7× SDE multiple, the vast majority of the price is goodwill, you're buying earning power, not hard assets.
Why it matters when buying a business
Because goodwill is most of the price, its durability is everything. Goodwill tied to one departing owner or a single customer is fragile; goodwill in systems, brand, and a diversified base is what you actually want. In an asset sale, goodwill is amortizable over 15 years, a meaningful tax shield.
