Introduction

Owners often believe goodwill should add a significant premium to their business valuation. After years of building a reputation, nurturing customer relationships, and strengthening brand presence, it feels natural to assume goodwill has standalone value. Goodwill does matter in the marker, but its influence appears differently than most owners expect. Understanding how goodwill is evaluated helps support more accurate expectations when preparing to sell a business.

How Goodwill Shows Up in a Business Valuation

Goodwill does not appear as a separate line item in most small and medium-sized business valuations. Instead, it is embedded within the company’s earnings. When buyers apply a market multiple to normalized earnings, they are already paying for the strength of the relationships, brand loyalty, and reputation that support those earnings.

Strong goodwill contributes to strong performance, and strong performance increases value. If customer loyalty, brand recognition, and service standards generate consistent cash flow, those strengths are already captured in the valuation.

This is why goodwill does not sit outside the valuation framework. It is inside it, reflected in the stability and transferability of earnings.

Why Buyers Focus on Transferable Goodwill

Buyers are purchasing future earnings, not a seller’s history or personal reputation. Their priority is determining whether goodwill will transfer successfully after the owner exits. This is a major factor in business valuations, and a key reason brokerage professionals emphasize risk reduction.

Prospective buyers evaluate goodwill by asking:

• Will customers keep buying after ownership changes?
• Does the team maintain the service quality customers expect?
• Is demand generated by the brand, or by the owner?
• Does the business have a stable, diversified revenue base?

Goodwill that transfers smoothly reduces perceived risk, which allows the market to support a stronger multiple when determining the asking price for a business.

When Goodwill Strengthens Value

Goodwill lifts valuation when it shows up in metrics such as recurring revenue, strong margins, stable earnings, customer retention, documented processes, and strong online reviews. These indicators create confidence in the business future, which is why they matter to buyers looking to purchase a business.

Examples include:

• Multi-year customer relationships supported by staff
• A brand presence that consistently attracts new inquiries
• A well-trained team that delivers reliable results
• Positive reviews and reputation that continually drive sales
• Consistent service standards backed by documented processes

In these cases, goodwill helps justify a stronger valuation multiple because it meaningfully impacts future performance.

When Goodwill Does Not Increase Value

Goodwill does not increase value when it is tied primarily to the owner personally, such as personal relationships, hands-on involvement, community status, or the owner’s individual reputation. While these elements matter operationally, they do not strengthen value unless they can transfer to the buyer.

Goodwill loses value fast when earnings are inconsistent, margins are thin, or the business can’t function without the owner present every day. In fact, those “inconsistent” earnings are often a sign that the business is overly dependent on the owner and is something that typically shows up as declining revenue in the years leading up to a sale, when the owner starts stepping back or thinking about retirement. Strengthening goodwill before you hit that stage is critical, and we outline exactly how to do that later in this post.

The market rewards transferable goodwill, not sentimental goodwill.

Why the Market, Not the Story, Sets the Multiple

An earnings-based business valuation reflects industry benchmarks, risk, buyer expectations, and market reality. The story behind the company adds context but does not determine value. Goodwill enhances value only when it strengthens future earnings in measurable ways.

This is why a reputable business brokerage firm will always guide sellers toward understanding how goodwill fits into the valuation framework. It is part of the market multiple, not an addition to it.

Strengthening Goodwill Before Selling

Owners planning to sell can increase valuation by improving the transferability of goodwill. Steps that strengthen market confidence include:

• Shifting customer relationships to the team
• Expanding documentation and processes
• Improving online reviews and brand presence
• Diversifying the customer base
• Delegating more responsibility to staff

These actions reinforce the business beyond the owner and help improve valuation outcomes.

Conclusion

Goodwill carries value, but not as a separate item added on top of a valuation. Instead, it is woven into the business performance that supports earnings and influences the market multiple. When goodwill strengthens stability, reduces risk, and transfers effectively to a new owner, it strengthens value. Understanding this framework helps owners prepare with clarity as they plan to exit and capitalize on the business they built.

Ready to learn about how your business goodwill affects the value of your business? Reach out to OConnor Business Brokers today to learn more about our valuation process, and how we can help you prepare to sell your business!