Financing Goodwill When Buying a Business in Australia
Goodwill is the portion of a business's purchase price that exceeds the fair market value of its physical assets — the equipment, stock, vehicles, and property. It's the price you're paying for the relationships, reputation, brand, customer base, and systems that an owner has built over years. In Australian small business transactions, goodwill often represents 40–70% of the total purchase price.
The problem is that most banks won't lend against it.
This catches a lot of first-time buyers off guard. You find a plumbing business turning over $2 million with solid EBITDA, you're approved for a loan, and then your broker tells you the bank will fund the tangible assets but not the goodwill — which is most of the asking price. So where does that money come from?
This article covers what goodwill actually is, why lenders treat it the way they do, and the practical options available to buyers in Australia who need to fund it.
What Is Goodwill in a Business Purchase?
Goodwill is the premium a buyer pays above the net asset value of a business. If a landscaping business has trucks, trailers, and equipment worth $150,000, and you're paying $550,000 for the business, the goodwill component is $400,000.
That $400,000 represents things you can't put in a warehouse — the fact that 300 regular customers call this business by name, that the crew show up on time and know what they're doing, that the phone has been ringing for twelve years without anyone spending on advertising (which means either something's working well or someone's hiding something — due diligence is your friend here).
There are two types worth understanding:
Personal goodwill is tied directly to the seller — their relationships, their reputation, their expertise. If customers only stay because they like the owner, that goodwill evaporates the moment he hands you the keys. This is the most dangerous type to pay for.
Business goodwill is attached to the business itself — the systems, the brand, the contracts, the location. A cleaning company with 50 active commercial contracts has business goodwill. A sole-trader electrical business where the owner knows every customer's name might have very little.
Understanding how goodwill is valued before you negotiate price is essential — because the amount you'll need to fund it depends entirely on how much of it is real.
Why Banks Won't Lend Against Goodwill
Banks lend against security. Security means an asset they can sell if you stop making payments. A truck has security value. So does commercial property. Equipment has security value — albeit depreciated, and the bank will apply a haircut.
Goodwill has no security value. If you default on a business loan, the bank can't repossess the customer relationships or the business reputation. They can take the tangible assets, but those often don't cover the full loan. This is why a standard commercial bank — NAB, CommBank, ANZ, Westpac — will typically fund only the tangible assets of a business acquisition, sometimes with a bit of margin for stock and working capital, but rarely the goodwill.
There is one well-known exception: professional practices. BOQ Specialist, Macquarie Bank's professional finance arm, and a handful of other specialist lenders will lend against goodwill for medical practices, dental clinics, veterinary practices, accounting firms, and legal practices. The logic is that goodwill in these sectors is remarkably stable — patients don't leave when a GP sells their practice, and referral relationships persist across ownership changes. The lenders have decades of data to back this up.
If you're buying a trades business, a cleaning company, a landscaping run, or a pest control operation, you're unlikely to qualify for this treatment. You'll need to fund the goodwill yourself, or find another structure.
Your Options for Funding the Goodwill Component
Cash from Savings or Investments
The cleanest option, and the one banks most like to see, is contributing your own cash to cover the goodwill. This demonstrates commitment and reduces the lender's risk. Most banks lending on business acquisitions want to see the buyer contributing meaningful equity — typically 30–50% of the total purchase price — and ideally some portion of that going towards the intangibles.
The obvious downside: cash you put into a business purchase is cash you can't invest elsewhere. Make sure you're not cleaning out your liquidity entirely. Running a business in the first twelve months often throws up unexpected expenses (I've seen a new owner get hit with a $40,000 ATO bill from the previous owner's PAYG obligations within sixty days of settlement — tax due diligence matters).
Home Equity
Using home equity to fund goodwill is one of the most common strategies for first-time business buyers in Australia. If you have a mortgage with available equity, you can draw down on that equity and use it as your contribution to the business purchase.
The bank sees this as you pledging your home as additional security — which they like, because a house is something they can actually sell. It shifts the risk onto you, but it also tends to unlock better loan terms and sometimes larger loan amounts than a business-only structure.
We've covered using home equity to buy a business in more detail separately, including the loan-to-value ratios and what lenders look for.
Vendor Finance
Vendor finance — where the seller leaves some of the purchase price as a loan that you repay over time — is one of the more elegant solutions to the goodwill funding problem. The seller, in effect, becomes your lender for a portion of the price.
This is increasingly common in Australian small business sales, particularly where the seller is motivated to complete the transaction rather than walk away. A seller who has run a business for twenty years and genuinely wants to retire has incentive to make the deal work, even if it means waiting a few years to collect part of the proceeds.
The typical structure might involve 70–80% of the purchase price paid at settlement (funded through your deposit plus a bank loan on tangibles), with 20–30% deferred as vendor finance at an agreed interest rate over three to five years. The seller gets a promissory note rather than cash; you get a manageable funding structure.
The risk for the seller is obvious — if the business fails, they might not get paid. Good sellers will want security over the business or personal guarantees. The risk for you is that you're now accountable to both a bank and a seller, and any cash flow pressure in the early years puts both relationships at risk. Read more about vendor finance and how to structure it correctly.
Earn-Out Structures
An earn-out is different to vendor finance, though it's sometimes confused with it. With an earn-out, a portion of the purchase price is contingent on the business hitting agreed performance targets after you take over. If revenue stays above $1.5 million for the next two years, you pay an additional $200,000. If it doesn't, you don't.
For funding goodwill specifically, earn-outs can work well because they de-risk the goodwill question: you're only paying for the intangible value if it actually materialises under your ownership. The seller, understandably, may push back — they've built the business and want to be paid for it. Negotiating the right earn-out structure requires care on both sides.
We've covered this in more detail in the earn-out agreement article.
Structuring Around Goodwill
Sometimes the best approach to financing goodwill is reducing how much goodwill you're paying for. A few ways buyers do this:
Asset vs share sale. In an asset sale, the buyer acquires specific assets (equipment, contracts, plant) rather than the company entity. This can shift the balance of the purchase price toward tangible assets and away from goodwill, which sometimes makes bank financing easier to arrange. It also has tax implications for both parties that your accountant needs to model before you agree to a structure.
Negotiating the allocation. The split between tangible assets and goodwill in a business sale is negotiated, not fixed. A seller might be open to allocating more of the price to plant and equipment — which the bank will lend against — and less to goodwill, particularly if the overall price is agreed. This can meaningfully shift your financing structure without changing the total you pay.
Buying at a lower multiple. This is the simplest version of reducing goodwill exposure: pay less for it. A business trading at 2x EBITDA will have a much smaller goodwill component than the same business at 3.5x. This is why knowing what multiple is appropriate for the type and size of business you're buying is worth understanding before you make an offer.
The Practical Reality
Most buyers I speak to who are in the $300,000–$600,000 price range end up using a combination of approaches: some cash from savings, home equity for the bulk of the deposit, a commercial loan on the tangible assets, and ideally a small vendor finance component to bridge the gap. That's not a neat structure, but it's what actually gets deals done.
The businesses where goodwill financing is hardest are the ones where goodwill is highest relative to tangibles — professional services, knowledge businesses, client-list businesses. The businesses where it's most manageable are the ones with significant plant and equipment — manufacturing, HVAC, larger landscaping operations with a fleet.
If you're looking at a trades business with strong recurring revenue but limited tangibles, the financing conversation needs to start early and involve both your bank and your accountant. Don't leave it until after you've signed an LOI.
This is covered in depth in Module 6 of the Playbook, which walks through how to model different financing structures and decide what works for your situation.
Want the full framework for comparing your financing options? Grab the free Financing Options Checklist — it covers bank loans, vendor finance, home equity, and earn-outs with worked examples for each.
Frequently Asked Questions
What is goodwill when buying a business? Goodwill is the amount paid above the fair market value of a business's physical assets. It represents intangible value — customer relationships, brand, systems, and reputation — and typically accounts for 40–70% of the purchase price in Australian small business sales.
Will Australian banks lend against goodwill? Most major banks won't lend against goodwill as security because it has no realisable value if the business fails. Specialist lenders do fund goodwill for professional practices (medical, dental, legal, accounting) where goodwill is historically stable. For trades and service businesses, buyers generally need to fund goodwill with cash, home equity, or vendor finance.
How much should you pay for goodwill when buying a business? Goodwill should reflect the real, sustainable earning power of the business above and beyond what you could replace from its physical assets. The maximum you'd rationally pay is the discounted present value of excess future earnings — which depends heavily on how owner-dependent the business is and how likely those earnings are to continue under new ownership.
Can the seller finance the goodwill component? Yes. Vendor finance — where the seller defers part of the purchase price and takes a promissory note — is a common and practical way to fund goodwill in Australian business sales. It typically requires the seller to accept some risk that the business performs under new management. Terms vary but three-to-five-year structures with interest are standard.
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