Goodwill is the intangible value built from reputation, clients and potential future earnings.
It’s what makes one business worth more than another with the same physical assets. In everyday trading, goodwill drives customer loyalty and brand recognition. In insolvency, it helps determine what a company is really worth and whether there’s enough value to rescue it.
Understanding goodwill
Goodwill represents the non-physical assets that make a business successful. You can’t see or touch them. But they’re often what buyers are really paying for.
It’s the strength of your client relationships, your brand’s reputation, your employees’ skills and your ability to generate profit above what the tangible assets alone could achieve.
When a company is valued — especially during Administration or liquidation — goodwill sits alongside property, stock and equipment as a key part of the overall picture.
Why goodwill matters in insolvency
When a business becomes insolvent, the question isn’t just how much the assets are worth. It’s whether the business itself still has value that can be protected.
That’s where goodwill comes in. It can:
Support a rescue or sale: A strong reputation or loyal client base can justify a Company Voluntary Arrangement (CVA) or attract a buyer in administration.
Increase creditor returns: If goodwill can be sold with the business, it raises the total realised value.
Guide director decisions: When goodwill is lost, recovery is rarely realistic; when it’s intact, saving the company may still make sense.
Understanding goodwill helps directors and insolvency practitioners decide whether to rebuild or close down.
How goodwill is valued
Goodwill isn’t an exact science, but valuers and insolvency practitioners use three recognised approaches to estimate it.
1. Income approach
This method looks at the future. It estimates how much extra profit the business is expected to generate because of its reputation, contracts or customer loyalty. The forecasted “excess” earnings are then converted to a present value.
2. Market approach
Here, goodwill is benchmarked against recent sales of similar businesses. The valuer compares what portion of each sale price was attributed to goodwill to find a realistic figure.
3. Cost approach
This approach considers what it would cost to rebuild the same reputation and relationships from scratch. For example, the marketing spend and time required to win the same level of trust or brand awareness.
Each method aims to answer the same question: how much is the business’s reputation and client base worth to someone else today?
What affects goodwill when a company’s in trouble
Insolvency can erode goodwill. But not always. The value depends on what’s still intact.
Factors that influence goodwill include:
Customer confidence: If clients will stay after a sale or restructure, goodwill remains strong.
Brand perception: Negative press or creditor action can damage reputation fast.
Contracts and recurring revenue: Ongoing agreements or subscriptions can preserve goodwill even when trading pauses.
Team and systems: Skilled staff, processes and know-how can add significant intangible value.
Industry outlook: In sectors where buyers or investors see potential, goodwill may still hold weight even after losses.
When goodwill rests on the directors personally, as with many small professional firms, its value may fall sharply once they step away.
Goodwill in administration and pre-pack sales
If an insolvent business still has customers, contracts and brand recognition, goodwill often becomes the cornerstone of a rescue plan.
In Administration, the insolvency practitioner aims to achieve the best return for creditors, usually by selling the business as a going concern. The goodwill, such as reputation, client base, contracts and systems, can be sold along with the tangible assets.
In a Pre-Pack Administration, where the sale is arranged in advance, independent valuers assess goodwill to ensure the price reflects fair market value. For example, a restaurant group with loyal diners and a well-known name may still command goodwill value despite tax arrears. Selling that goodwill as part of a Pre-Pack can preserve jobs and customer continuity, achieving a better result than liquidation.
Goodwill in liquidation
Once trading stops, goodwill quickly loses value. Customers move on, contracts end and the brand fades from view. Even so, a liquidator must assess whether any residual goodwill remains. It may still exist in:
- A recognised trading name or website
- Copyrights, designs or intellectual property
- Databases or customer lists
- Domain names or software
The liquidator’s role is to realise as much value as possible for creditors. Even a small sum from the sale of goodwill can make a difference.
When goodwill supports a business rescue
In many restructures, goodwill is what keeps the business alive.
A CVA works only if the business can generate enough income to pay its creditors over time. Strong goodwill (loyal customers, long-term contracts or brand equity, for example) provides the confidence that future earnings will support repayment.
For example, a consultancy with trusted clients but short-term cash-flow issues may use its goodwill to justify a CVA proposal. It shows creditors that the business can recover and remain profitable once the immediate debt pressure eases.
How insolvency practitioners handle goodwill
Licensed insolvency practitioners must treat goodwill carefully and objectively. Their legal duty is to maximise returns for creditors while ensuring any sale or valuation stands up to scrutiny. They will:
- Review financial performance to identify the earnings attributable to goodwill.
- Obtain independent valuations where intangible assets form a large part of the business’ worth.
- Document the methodology used, so that creditors and regulators can see how the figure was reached.
This transparency protects directors and the practitioner alike, proving that goodwill was valued fairly and any sale price reflects market conditions.
Key takeaways On goodwill in insolvency
- Goodwill is the intangible value built from reputation, clients and potential future earnings.
- In insolvency, it can determine whether the business is sold, rescued or closed.
- Strong goodwill can justify rescue routes like administration or a CVA.
- Weak or lost goodwill usually means liquidation is the most realistic outcome.
- Independent valuation ensures fairness and compliance with insolvency law.
Get advice on valuing goodwill in a distressed business
If your company is under pressure, your goodwill might still hold the key to recovery. Understanding its value helps you see whether there’s something worth saving or if it’s time to close cleanly and move on.
Our licensed insolvency practitioners can assess the strength of your goodwill, provide a realistic valuation and guide you through your options. Get in touch today for free, confidential advice on valuing goodwill and choosing the right route for your business.
