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Goodwill

The premium a buyer pays above the fair value of the hard assets, for everything about the business that cannot be touched.

What Goodwill Is​

Goodwill is the gap between what a business sells for and the fair-market value of its net hard assets minus liabilities. Warrillow defines it as

"The difference between a company's market value and the fair-market value of its net (hard) assets minus liabilities; the intangible value an acquirer pays for."

Warrillow, The Art of Selling Your Business, ch. 1

It captures the things a balance sheet cannot list: the team, the brand and reputation, the customer relationships, the recurring revenue, and the story of what the business could become under new ownership. McDannell describes goodwill as the intangible value that matters most for businesses with few physical assets, such as digital companies whose worth is almost entirely in their people, systems, and earnings rather than equipment.

For owners of profitable businesses worth between $1 million and $50 million, goodwill is not a footnote. It is most of the price. Warrillow scopes his entire book to these "goodwill" deals, where the sale price is driven by intangibles rather than the liquidation value of the assets.

Value Is in the Eye of the Acquirer​

The size of the goodwill premium is not fixed. It depends on who is buying and how much they want what they cannot touch. This is Warrillow's framing thesis.

"The art of selling your business is getting someone to value something they cannot touch. In essence, they are buying a story about what your business could be in their hands."

Warrillow, The Art of Selling Your Business, ch. 1

The same company is worth different amounts to different buyers, because each buyer assigns a different value to the intangibles.

"One person's ceiling tile is another person's masterpiece."

Warrillow, The Art of Selling Your Business, ch. 1

A seller's job, then, is to find and court the buyer who places the highest value on the intangible story. A strategic buyer who can plug your customers into an existing sales engine will pay the largest goodwill premium. A competitor or industry buyer will pay the least, and McDannell warns that some buyers refuse to pay for goodwill at all: industry buyers and direct competitors often value only the hard assets and the customers they can absorb, not the brand or the team they intend to fold into their own.

Why It Shows Up in the Multiple​

In practice goodwill is rarely calculated line by line during a sale. It is expressed through the earnings multiple. McDannell frames the multiple as the place where intangibles do their work.

"Sale price as a multiple of earnings (e.g., 4.5x); varies by industry; intangibles (team, reputation, recurring revenue) justify above-average multiples."

McDannell, Get Acquired

A business with a strong brand, low owner dependence, durable recurring revenue, and a happy customer base earns a higher multiple than an otherwise identical business without them. That extra multiple is goodwill, paid as a premium on earnings rather than booked as a separate asset. The practical lesson for an owner is that building goodwill (reputation, systems, recurring revenue, a team that runs without you) is what lifts the headline price, and that the premium only materializes when there is a buyer in the room who wants the intangibles enough to pay for them.

Further Reading​

Sources: Warrillow, The Art of Selling Your Business ch.1; McDannell, Get Acquired