How to Transfer Personal Goodwill on the Sale of a Business

In Tasmania, most businesses are small — typically employing fewer than 10 people. In these businesses, a significant portion of the sale price often relates to personal goodwill rather than physical assets. This goodwill exists because the owner has built long-standing relationships with customers, suppliers and the broader community.

Consider a small accounting practice where the principal accountant manages every client personally. Clients trust that individual, not just the firm name. When that business is sold, the challenge is not transferring the desks, computers or client files — it’s transferring the trust and relationships behind them.

This is where risk enters the negotiation.

Sellers are usually confident that customers will remain loyal after settlement. Buyers, however, focus on the possibility that clients may leave once ownership changes. From a buyer’s perspective, they are being asked to pay upfront for goodwill that may or may not transfer successfully.

Understanding the Risk

Goodwill in small businesses is often highly personal. It is tied to:

The owner’s reputation
Long-term customer relationships
Personal service and communication style
Community standing

If customers leave, the goodwill — and the value paid for it — can quickly diminish.

This difference in perception creates tension: the seller sees security, the buyer sees uncertainty.

Aligning Interests Through an Earn-Out Strategy

One effective way to manage this issue is through an Earn-Out Strategy. An earn-out aligns the interests of both parties by sharing the risk of future performance.

Under this structure:

The buyer pays most of the purchase price upfront.
The balance is paid over time.
Future payments are contingent on the business meeting agreed performance targets (typically revenue or profit benchmarks).

This structure ensures:

The buyer is protected if performance drops.
The seller is rewarded if customers stay and revenue is maintained.
Both parties remain motivated to ensure a smooth transition.

Example Scenario

Assume a business generates $1,000,000 in annual sales revenue and is offered for $350,000, made up of:

$100,000 for tangible assets (plant, equipment and stock)
$250,000 for goodwill

A possible structure could be:

$100,000 paid upfront for the physical assets.
$187,500 (75% of goodwill) paid upfront.
The remaining $62,500 paid in an instalment on the 1-year anniversary of the sale.

The deferred payment would only be made if the business achieves at least $1,000,000 in revenue in the next year.

The logic is practical: it is unlikely that a quarter of the customers would leave immediately upon change of ownership. Therefore, paying 75% of the goodwill upfront is a reasonable compromise, with the balance tied to proven performance.

Why Earn-Outs Work

An earn-out:

Reduces buyer risk.
Encourages the seller to actively assist during the transition.
Supports proper handover of relationships.
Protects the value of the business.

It also ensures the seller remains a supportive ambassador of the business, rather than walking away immediately after settlement.

Additional Considerations

For an earn-out to succeed, the agreement should clearly define:

How revenue or profit is calculated.
Timeframes for measurement.
Reporting requirements.
The seller’s involvement during the earn-out period.
What happens if external events impact performance.

Clear documentation avoids future disputes.

In small business sales, transferring personal goodwill is often the biggest hurdle. A carefully structured earn-out strategy provides a practical solution by balancing confidence with caution and aligning both parties toward the same goal — maintaining the business’s ongoing success.

Keywords: Business acquisition finance, Business purchase loan, Business loans Australia, Commercial finance broker, Buy a business