Goodwill

What it is

Goodwill = Purchase price − Fair market value of tangible assets (equipment, inventory, real estate if owned).

If you pay $1M for a business with $400K of equipment and $100K of inventory (and no real estate), the goodwill component is $500K. You're paying $500K for the intangible value — the brand, the customer base, the trained workforce, the systems, the reputation, the lease, the licenses.

Why it matters

• Tax treatment. Goodwill is typically amortized over 15 years for federal tax purposes (Section 197). This can produce a meaningful tax shield for the buyer — review with a CPA.
• SBA 7(a) requirements. SBA 7(a) loans for acquisitions with a high goodwill component typically require a larger buyer equity injection. SOP 50 10 8.1 sets the SBA floor at 10% of total project cost on a first acquisition and states it cannot be reduced or eliminated ^[1] ; individual lenders can and do require more than that floor where most of the price is goodwill. That is the lender's own credit policy, not an SBA rule, and the only way to know the number is to ask the lender what they require on your deal before you size your cash.
• Asset purchase vs. entity purchase. In an asset purchase, the buyer gets a step-up in basis on the goodwill (amortizable). In an entity purchase, the goodwill stays on the seller's historical books — no step-up. Review with a CPA.
• Purchase price allocation. The allocation of the purchase price among tangible assets, inventory, and goodwill is negotiated between buyer and seller — and has real tax consequences for both. Each party's incentive differs.

What goodwill is NOT

• Not "blue sky" — goodwill is a real, measurable component of the purchase price.
• Not a euphemism for "overpayment" — though paying too much for goodwill is a common buyer mistake.
• Not the same as brand value alone — goodwill also includes customer relationships, workforce, systems, licenses, and lease value.

How to diligence goodwill

• Customer base stability. Recurring customer rate, customer concentration, average tenure.
• Workforce stability. Key employee tenure, retention through transition.
• Brand and reputation. Online reviews, industry reputation, brand awareness in the target market.
• Systems and processes. Documented SOPs, POS data quality, financial reporting quality.
• Lease value. A below-market lease in a desirable location is a real intangible asset — but only for the remaining lease term.
• License value. Transferable licenses (SLA, OCFS, DMV, etc.) are real intangible assets — verify transferability before close.

New York-specific notes

• NYS follows federal Section 197 amortization for goodwill — no separate NYS adjustment (verify with a CPA).
• NYC businesses may have higher goodwill components because of location value (subway-adjacent, foot-traffic-rich) — model the post-renewal rent to verify the goodwill isn't overstated.
• For licensed NYS businesses (liquor stores, restaurants, childcare, etc.), the license itself contributes to goodwill — but only if it's transferable. An un-transferable license destroys goodwill value.