Personal goodwill is a hot topic today and with good reason. As the economy changes, more people are looking to sell their business. Here are some things you should know about how personal goodwill impacts the sale of businesses. 

  • A positive personal reputation
  • A personal relationship with many of the largest customers and/or suppliers
  • Company products, publications, etc., as the sole author, designer, or inventor

Personal goodwill can be established through relationships with tax advisors, doctors, dentists, attorneys, and other personal service providers. These relationships are wonderful benefits, but unfortunately, they’re non-transferable. As the old saying goes, in businesses built around personal goodwill, the goodwill goes home at night.

It can be difficult to sell a business, regardless of size, where personal goodwill plays an integral role in the business’ success. For larger businesses, it may not be as important since the key to profitability may not lie with one person. However, for small to medium-sized businesses, personal goodwill can make or break a sale. Buyers need to understand and consider this goodwill when deciding whether or not to purchase the business. 

In the case of the sale of a medical, accounting, or legal practice, existing clients/patients may visit a new owner of the same practice. It may they are used to coming to that location, they have an immediate problem, or they have some other practical reason for staying with the same practice. Existing clients may visit the new owner of the same practice – they’re used to coming to that location, they have an immediate problem, or they have some other practical reason for staying with the same practice. However, if existing clients or patients don’t like the new owner, or they don’t feel that their needs were handled the way the old owner cared for them, they may look for a new provider. The new owner might be as competent as, or more competent than, his predecessor, but chemistry, or the lack of it, can supersede competency in the eyes of a customer. 

Most buyers will want some protection in case things go wrong after the sale, and one way to provide that is by having the seller stay on for a period of time after the sale. This gives them a chance to work with the new owner and slowly transfer that goodwill. Obviously, some of it will be lost in the process, but that should be taken into account when setting the price.

There are different factors that contribute to the overall value. One such factor refers to the good will that the seller has built up with their customers over time. This goodwill can be lost when the business is sold, so there are methods businesses can use to protect it.

Another approach is through the use of an earnout. This is a payment that is made to the seller at the end of the year, based on the amount of business that can be attributed to their personal goodwill. A percentage is then subtracted from the monies owed to the seller, or funds from the down payment are placed in escrow, and adjustments are made from that source.

The sale of goodwill can be a two-event taxable situation, as the business doesn’t own the goodwill – the owner does. Your tax professional can give you more information on this matter. So if you’re looking to sell your business, it’s worth knowing about personal goodwill and the tax benefits it offers.

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