Goodwill is the value of a food service business above its tangible assets. It represents things like customer base, reputation, location and future profit potential. During a takeover, goodwill often determines the largest part of the purchase price, but how do you calculate this objectively?
What exactly is goodwill?
Goodwill consists of all intangible value of a food service business. Think of the established customer base, the reputation, the location, the brand, existing supplier contracts and the team that's already trained.
💡 Example:
Restaurant with tangible assets of €150,000:
- Kitchen equipment: €80,000
- Furniture: €40,000
- Inventory: €15,000
- Cash: €15,000
Sale price: €400,000
Goodwill: €400,000 - €150,000 = €250,000
The three main calculation methods
There are different ways to calculate goodwill. Each method provides a different perspective on the value.
1. Profit multiplier method
This method multiplies annual profit by a factor (usually 2-5 years). The factor depends on the type of business, profit stability and market conditions.
💡 Example:
Bistro with stable annual profit of €80,000:
- Factor 3.5 (average for bistros)
- Goodwill: €80,000 × 3.5 = €280,000
2. Revenue multiplier method
Here you multiply annual revenue by a percentage. For restaurants this is usually between 0.3 and 0.8 times annual revenue, depending on profitability and growth.
💡 Example:
Restaurant with €600,000 annual revenue:
- Factor 0.5 (average profitability)
- Goodwill: €600,000 × 0.5 = €300,000
3. Discounted Cash Flow (DCF)
The most comprehensive method. You project future cash flows and discount them to present value. Complex, but most accurate for stable businesses.
Factors that influence goodwill
The amount of goodwill depends on various factors you need to consider:
- Location: A-location significantly increases goodwill
- Lease contract: Long contract with low rent = higher goodwill
- Profit trend: Rising profit justifies higher multiplier
- Competition: Unique position increases value
- Seasonality: Stable annual revenue is worth more
- Owner dependency: If everything depends on the current owner, lower goodwill
⚠️ Note:
Goodwill is subjective. What's valuable to you (loyal customers, location) may have less value to someone else. Calculate using multiple methods and take the average.
Common mistakes in goodwill calculation
Many entrepreneurs make the same mistakes when determining goodwill:
- Including emotional value: Your memories have no financial value
- One-off good years: Use average profit over 3-5 years
- Ignoring hidden costs: Deferred maintenance, legal issues
- Ignoring market conditions: Corona, economic crisis affect value
Practical tips for negotiation
Goodwill is negotiable. Use these insights to reach a fair price:
💡 Negotiation example:
Seller asks €350,000 goodwill, your calculation:
- Profit multiplier: €280,000
- Revenue multiplier: €300,000
- Average: €290,000
Realistic offer: €290,000 - €310,000
How do you calculate goodwill? (step by step)
Gather financial data from at least 3 years
Request profit and loss statements, tax returns and cash flow summaries. Watch for trends: is profit rising or falling? Calculate the average over 3-5 years for a realistic picture.
Determine the value of tangible assets
Make a list of all physical possessions: kitchen equipment, furniture, inventory, cash. Have expensive equipment professionally appraised. Subtract liabilities from assets for net value.
Calculate goodwill using multiple methods
Use both profit multiplier (2-5x annual profit) and revenue multiplier (0.3-0.8x annual revenue). Take the average of both results. Adjust for special circumstances such as location advantage or lease risks.
✨ Pro tip
Always calculate goodwill using multiple methods and take the average. Goodwill that's too high means years of payback, goodwill that's too low could be a missed opportunity on a good business.
Calculate this yourself?
In the KitchenNmbrs app you can do this in just a few clicks. 7 days free, no credit card.
Was this article helpful?
Frequently asked questions
What is a normal goodwill as a percentage of revenue?
For restaurants, goodwill is usually between 30% and 80% of annual revenue. This depends heavily on profitability, location and stability. A profitable business in an A-location can reach 60-80%, a marginal business often no more than 30-40%.
How do I calculate goodwill if the business is making losses?
For loss-making businesses, goodwill is often nil or negative. Focus instead on the value of location, lease contract and potential. Sometimes you only pay for tangible assets plus a small premium for licenses and location.
Do I have to depreciate goodwill after purchase?
Yes, goodwill must be depreciated fiscally over 10 years (10% per year). This means an annual deduction of €25,000 on €250,000 goodwill. Factor this into your business plan and cash flow.
What if seller and buyer disagree on goodwill?
Have an independent business appraiser do a valuation. This costs €2,000-5,000 but provides objective support. Often parties then reach a compromise around this professional valuation.
How does Corona affect the goodwill of food service businesses?
Corona has significantly lowered goodwill. Use pre-Corona figures with caution and focus on recent performance. Businesses that performed well during the crisis can actually justify higher goodwill through proven resilience.
📚 Sources consulted
- EU Verordening 852/2004 — Levensmiddelenhygiëne (2004) — Official source
- EU Verordening 853/2004 — Hygiënevoorschriften voor levensmiddelen van dierlijke oorsprong (2004) — Official source
- EU Verordening 1169/2011 — Voedselinformatie aan consumenten (2011) — Official source
- NVWA — Hygiënecode voor de horeca (2024) — Official source
- NVWA — Allergenen in voedsel (2024) — Official source
- Codex Alimentarius — International Food Standards (2024) — Official source
- FSA — Safer food, better business (HACCP) (2024) — Official source
- BVL — Lebensmittelhygiene (HACCP) (2024) — Official source
- Warenwetbesluit Bereiding en behandeling van levensmiddelen (2024) — Official source
- WHO — Foodborne diseases estimates (2024) — Official source
Food Standards Agency (FSA) — https://www.food.gov.uk
The HACCP standards shown in this application are for informational purposes only. KitchenNmbrs does not guarantee that displayed values are current or complete. Always consult the FSA or your local authority for the latest regulations.
Written by
Jeffrey Smit
Founder & CEO of KitchenNmbrs
Jeffrey Smit built KitchenNmbrs from 8 years of hands-on experience as kitchen manager at 1NUL8 Group in Rotterdam. His mission: give every restaurant owner control over food cost.
All your financial KPIs in one dashboard
Food cost percentage, gross margin, revenue per cover — KitchenNmbrs calculates it all automatically based on your recipes and purchases. Start your free trial.
Start free trial →