Goodwill

Definition

The part of a price paid above the hard assets, for the earnings.

Why It Matters

SBA lending finances it where a conventional bank often will not, which is why so many acquisitions run through the 7(a) program in the first place. It also explains the collateral shortfall on most service-business deals, since a lender holding mostly intangible value leans on cash flow and a personal guarantee instead. In an asset purchase the amount booked here is written off against taxable income over fifteen years, so how the price is allocated between it and the hard assets is worth real money to both sides.

In numbers: A $4M business with $600k of equipment and inventory carries $3.4M of goodwill: the price is 85% for the earnings and relationships, which is exactly the part a conventional asset-based lender will not touch and the 7(a) will.