Can you borrow to pay for goodwill when you buy a business?

Here’s a moment almost every business buyer hits. You’ve found a great little operation: loyal regulars, steady profits, a name people know. The asking price is $500k. Then the broker’s information memorandum shows the fit-out, gear and stock are worth maybe $110k.

So what’s the other $390k for? That’s goodwill, and it’s the part of the deal lenders get nervous about. The good news: goodwill-heavy purchases get funded every day. You just need to know how lenders think about it and build the deal around that.

What exactly are you paying for when you pay for goodwill?

Goodwill is everything that makes a business earn more than its physical assets would on their own. Think of the customer list, the reputation, the location, the trained staff, the systems, the supplier terms and the phone that keeps ringing.

In dollar terms it’s simple: purchase price minus the value of the tangible assets. business.gov.au’s guide to valuing a business is refreshingly honest about it: “Calculating goodwill can be a complicated process”, and in the end “the value is what the marketplace or buyer is willing to pay.”

Here’s how a typical price might break down:

Part of the price	What it covers	Can a lender sell it if things go wrong?
Equipment and vehicles	Ovens, hoists, vans, computers, fit-out	Yes, though usually for less than you paid
Stock	Saleable goods on the shelf	Partly, often at a discount
Goodwill	Customers, reputation, location, systems	No — it mostly vanishes if the business stops

That last column is the whole story.

Why are lenders so cautious about goodwill?

Lenders think about two things: can you repay, and what happens if you can’t? Goodwill scores well on the first question if the business is genuinely profitable. It scores poorly on the second.

A few reasons goodwill makes a credit team twitchy:

• It can walk out the door. If customers were loyal to the old owner rather than the business, some of them leave when the owner does.
• It’s tied to the lease. A café with eighteen months left on its lease and no option to renew may have far less goodwill than the price suggests.
• Nobody can repossess it. If the loan goes bad, a lender can auction a forklift. It can’t auction a reputation.
• It’s subjective. Two valuers can land a long way apart, as business.gov.au points out, because different methods give different answers.

None of this means “no”. It means the lender wants the loan supported by something more than the goodwill itself.

What do lenders look at when most of the price is goodwill?

When a deal is goodwill-heavy, expect closer attention to these:

1. Proven profits. Usually two or more years of financial statements, BAS and business bank statements from the seller. Lenders want to see that the earnings comfortably cover the new loan repayments, plus a living for you.
2. How long it takes the profits to pay back the price. If a business earns $150k a year and costs $500k, the profits cover the price in a bit over three years. A price that needs ten years of profit raises eyebrows.
3. The lease. Time remaining, renewal options, and whether the landlord will assign it to you.
4. Seller dependence. Does the business rely on the owner’s personal relationships, licence or skills?
5. Your experience. Running a similar business before is a big plus. If you haven’t, a solid handover period helps.
6. Your contribution and other security. Cash in, property equity, or both.

Our business acquisition loans page walks through the full document list lenders typically ask for.

How can you fund the goodwill part of the price?

Most buyers use a combination. The trick is to let each part of the price carry the finance that suits it, so the goodwill gap you need to cover is as small as possible.

Funding source	How it helps with goodwill	Watch out for
Your own cash	The simplest way to cover goodwill; shows commitment	Don’t drain the working capital you’ll need in month one
Property-backed loan	Equity in a home or commercial property supports the goodwill portion	Your property is security, so stress-test the repayments
Second mortgage	Uses spare equity without refinancing your existing home loan	Needs enough equity above the first mortgage
Caveat loan (Victoria only)	Short-term, property-backed bridge, e.g. while other funds are freed up	Short-term by design; plan the exit before you start
Equipment finance	Funds the vans, machinery and gear in the sale separately	Older equipment may be harder to finance
Vendor finance	Seller accepts part of the price later, backing their own goodwill	Lenders will want to see the terms and how it ranks
Earn-out	Part of the price depends on future results	Disputes over how “results” are measured
Unsecured business finance	Can help on smaller deals, typically $5k to $500k, sized on turnover	Usually needs trading history, so often more useful after settlement

Property-secured lending through our network covers $20k to $5m, which is why buyers with equity in property often find goodwill-heavy deals easier to fund. Not sure which shape fits your deal? Our loan matcher gives you a starting point, or you can talk it through with a real person before you make an offer.

What does a goodwill-heavy deal look like in practice? (illustrative)

This example is made up to show the moving parts. It isn’t a real client.

Sam, a licensed plumber in Newcastle, is buying an established plumbing business for $520k. The contract splits the price like this:

Item	Value
Three fitted-out vans	$90k
Tools and equipment	$25k
Stock (fittings, parts)	$25k
Goodwill (customer base, maintenance contracts, name, phone number)	$380k
Total price	$520k

Sam’s first lender would only fund the deal with substantial extra security, because almost three-quarters of the price is goodwill. Here’s how the deal was restructured:

• $80k equipment finance for the vans and tools, secured against the vehicles themselves.
• $120k cash from Sam’s savings.
• $260k second mortgage over Sam’s home, which had plenty of equity above the existing home loan.
• $60k vendor finance: the seller agreed to take the last part of the price in instalments over 12 months, while staying on for three months to introduce Sam to the strata managers and commercial clients.

That adds up to $520k. The vendor finance and handover did double duty: they reduced what Sam had to borrow, and they showed the lender the seller believed in the goodwill they were selling. Sam also kept a separate buffer for legal fees, duty where applicable and the first few months of wages. Our cash-flow gap estimator is handy for sizing that buffer.

Does goodwill change the tax and duty picture?

A little, and it’s worth knowing before you sign.

• Allocation matters. How the contract splits the price between goodwill, equipment and stock affects your tax position later. Equipment is generally depreciated over time, while goodwill is generally treated as a capital gains tax asset rather than something you write off each year. Get your accountant to review the split before you agree to it.
• Stamp duty varies by state. The Queensland Revenue Office warns that “the existence of goodwill may make your transaction dutiable” and says to clarify it early, as explained on its page on assessing business asset transfers. Other states treat business assets differently, so check with your state revenue office or solicitor.
• GST. Most business sales are structured as a GST-free going concern, which includes the goodwill. If the conditions aren’t met, GST may be added to the whole price. Our guide on GST when buying a business covers how that works.

How can you make goodwill easier to finance?

Some of the most powerful moves happen in the contract negotiation, not at the lender’s desk:

1. Lock in the lease. Negotiate an assignment with enough term and options to cover your loan.
2. Insist on a handover period. A seller who stays for a few weeks or months to introduce key clients protects the goodwill you’re paying for.
3. Get a restraint of trade. Stop the seller opening up around the corner and taking the customers with them.
4. Ask for vendor finance or an earn-out. If the seller is confident about the goodwill, they should be willing to back it.
5. Have your accountant normalise the profits. Strip out the owner’s personal expenses and one-off items so you and the lender see what the business really earns.
6. Check what’s transferring. Phone numbers, websites, domain names, social accounts and supplier agreements are all part of the goodwill. Make sure they’re in the contract. business.gov.au’s buy an existing business checklist is a good prompt.

If you’re buying into a franchise rather than an independent business, the franchisor’s approval and the remaining franchise term play a similar role to the lease. Our franchise finance page covers that side.

Ready to put a funding plan behind your offer?

Buying a business with real goodwill is buying a head start: customers, cash flow and a name that already works. The finance just needs to be built the right way, with each part of the price matched to the right kind of funding and the goodwill supported by something solid.

That’s exactly the kind of deal we like working through. Making an enquiry takes about 60 seconds, and there’s no credit check when you first enquire. We don’t spray your details around a pile of lenders either, so you won’t be fielding calls from strangers all week. A real person reads your enquiry, looks at your deal, the split between goodwill and assets, and the security you have, and then calls you to talk it through. Please fill the form in accurately, including the purchase price and any property you own, so we can find the right structure first time.

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