Distinguishing Personal vs Corporate Goodwill
December 18, 2018 | Randall Hebert
In many cases, a portion of the goodwill of a business can belong personally to individual owners rather than the business itself. Recognizing the differences has become increasing relevant, especially during the sale of a business.
What is goodwill?
Goodwill is an intangible asset of the value of a business, such as a location or reputation.
Personal goodwill vs. business goodwill
Personal goodwill attaches to an individual rather than to the business while business goodwill signifies a business’ intangible assets, such as patents or a company’s brand.
How to value personal goodwill
There is no formula to “calculate” empirically someone’s personal goodwill separate from corporate goodwill of a business enterprise. However, the factors to consider, generally, in valuing one’s personal goodwill include:
- Do personal relationships exist between customers and/or suppliers and the owner of the business?
- Do these relationships exist despite the lack of formal contractual obligations?
- Does the owners personal reputation in the industry provide an intangible benefit to the business?
- Does the owner employ innovative or unique practices or procedures in the industry such that the owner or manager is regarded as having contributed or added value to the industry as a whole (not just his business)?
- Does the owner lack an employment agreement with the business (or covenant not to compete – in which case, the business would be regarded as owning the individual’s goodwill such that separation is not possible)?
- Does the owner possess health and anticipated longevity such that he could continue working for the foreseeable future?
- Does the owner have experience outside the business being considered (are his skills transferable such that he could expect to earn an above market salary in another business he/she didn’t own)?
The calculation of someone’s personal goodwill can get tricky. For example, in a dealership, the primary driver of intangible value is the manufacturer’s marque. That doesn’t mean that the owner/dealer can’t add value over and above that, but remember that as a general rule, the multiples for overperforming dealers tend to skew downward while the multiples for underperforming dealers tend to skew upwards. This is due to the fact that generally, buyers worry they will not be able to continue an overperforming dealers success while they believe they can top an underperforming dealer’s lack of success. Both of these typical outcomes of negotiating multiples tend to work against the concept of personal goodwill. However, if you have a high performing dealer commanding a higher than average multiple, it’s quite possible that could be a starting source for determining how much personal goodwill you should carve out.
Important things to consider
First, negotiate two separate deals, two separate contracts, for the purchase of the corporation and its intangible value and the purchase of the personal goodwill. They can reference one another, but should not make reference to any intended total value or some such as that. Secondly, be careful. Negotiating one contract for the tangible assets of the business and a separate contract for the intangible value that assumes all the intangible value is personal and can get messy.
If you have a purchase contract in place that doesn’t contemplate separate personal goodwill, or if you need help crafting a contract, contact our valuations team.