What goodwill means
Goodwill is the difference between what a business is worth and what its things are worth.
Two restaurants on the same street with identical equipment can be worth very different amounts. One has been there fifteen years, everybody knows it, and the tables are full on a Tuesday. The other opened last month. The equipment is the same. The difference is goodwill.
It is made of specific things even though it is intangible. The reputation of the business. The habit customers have of returning. The relationships with suppliers. The name and how well known it is. The location and the trade that comes with it. The trained staff.
Accountants recognise it on a balance sheet only when it has been paid for, typically when one business buys another and pays more than the fair value of the identifiable assets. Goodwill you built yourself, however valuable, generally does not appear on your own accounts.
How it is used
It matters most at the point of sale.
When a business is sold as a going concern, the price is rarely just the value of the stock and the equipment. The buyer is paying for the customers who will keep coming, and that portion is goodwill. Nigerian small business sales frequently price it as a multiple of annual profit, with the multiple depending on how transferable the trade really is.
It also matters in franchising, where the franchisee is essentially buying access to goodwill built by the franchisor, and in licensing, where a brand is lent to somebody else's product.
A sale of goodwill needs specific protection in the agreement. Without it, the seller can open a similar business two streets away and take the customers straight back, leaving the buyer with equipment and nothing else. That is why a sale of business almost always includes a covenant restricting the seller from competing within a defined area for a defined period.
Key features
- Intangible value arising from reputation, customer connection and name
- Recognised on a balance sheet mainly when acquired rather than self generated
- Transferred with the sale of a business as a going concern
- Commonly valued as a multiple of maintainable profit in small business sales
- Protected on sale by a covenant restraining the seller from competing
- A chargeable asset, so its disposal can attract capital gains tax
How this works in Nigeria
Restraints on the seller of a business are treated differently from restraints on an employee, and that difference is worth knowing.
Courts are generally more willing to enforce a non compete against somebody who sold a business and was paid for its goodwill, because the buyer paid for exactly the thing the restraint protects. A restraint against a departing employee is scrutinised much harder. Both still have to be reasonable in duration, geography and scope.
Goodwill in Nigerian informal business is often personal rather than institutional. Customers come because of a specific individual, and when that person leaves the goodwill leaves with them. A buyer paying for goodwill in a small Nigerian business should ask hard whether the trade attaches to the business or to the owner, and price accordingly.
Registering the business name as a trademark is what converts part of that goodwill into an asset you can defend. Without registration, a reputation built over a decade can be traded on by a newcomer using a confusingly similar name, and the remedy is a passing off action, which is slower and harder than enforcing a registered mark.
Goodwill vs trademark vs business name registration
Related ideas that protect different things.
Goodwill is the underlying commercial value: the reputation and customer connection themselves. It is not registered anywhere.
A trademark is a registered right in the name or logo. It gives you a monopoly on that mark for the goods and services it covers, and it is the thing you enforce against a copycat.
Business name registration at the CAC records that you trade under a particular name. It is not a monopoly on the name and it does not stop somebody registering a similar trademark.
So a Nigerian business that registers its business name and stops there has recorded its existence but protected almost nothing. The reputation is the goodwill, the trademark is what lets you defend it, and both are worth far more than the certificate on the wall.
Limits and risks
Goodwill is fragile and it can evaporate. A scandal, a change of location, the departure of a key person or a decline in service can destroy in months what took years to build.
It is also hard to value objectively. Multiples are conventions rather than science, and buyer and seller frequently reach very different figures from the same accounts.
Self generated goodwill does not appear on your balance sheet, so a business may be far more valuable than its accounts suggest, which complicates lending and investment.
And goodwill tied to a person rarely transfers. Buying a consultancy whose clients came for the founder means buying a client list that may not renew, which is why earn out structures exist.
Worth knowing
When buying a business, make part of the price payable over time and tie it to the trade actually continuing, and take a properly drafted non compete from the seller. Buyers who pay everything on completion and take no restraint are the ones who watch the customers follow the seller down the road.
Questions people ask
What is goodwill in business?
It is the value of a business beyond its physical assets, arising from its reputation, customer relationships, name and location. It is why an established business sells for more than the value of its equipment and stock.
How is goodwill valued?
In small business sales it is commonly calculated as a multiple of maintainable annual profit, with the multiple reflecting how transferable the trade is. Valuation is a matter of negotiation rather than a fixed formula.
Does goodwill appear on a balance sheet?
Generally only when it has been purchased, for example where one business acquires another and pays more than the fair value of the identifiable assets. Goodwill you generated yourself is usually not recognised in your own accounts.
Can I stop the seller of a business from competing with me?
Yes, through a non compete covenant in the sale agreement. Courts are more willing to enforce restraints against a seller who was paid for goodwill than against a departing employee, provided the restraint is reasonable in duration, area and scope.
What is the difference between goodwill and a trademark?
Goodwill is the underlying reputation and customer connection. A trademark is a registered right in the name or logo, and it is the legal tool you use to stop somebody trading on that reputation.
Is goodwill taxable when I sell my business?
Goodwill is a chargeable asset, so a gain on its disposal can attract capital gains tax. Allocate the price between assets in the sale agreement and take advice on the tax treatment before completing.