This goodwill valuation guide discusses the difference between valuing personal goodwill and company goodwill.
Personal vs Business Goodwill: What You Need to Know When Selling a Business
Valuing Business Goodwill versus Personal Goodwill
When selling a business, it is essential that every aspect of the business is considered. A business is much more than just numbers on paper, and the presence of goodwill exemplifies this.
While dealing with goodwill, you will come across personal goodwill vs business goodwill. It is important to understand the difference between the two. In this article, we will explore how goodwill is defined, why it is important, and the differences between personal and business goodwill.
The Value in Reputation: How is Goodwill Defined in Business?
Goodwill in business is defined as an intangible asset that is calculated and included as part of a business’s value when it is sold. It increases the purchase price for a business and helps to accurately reflect the true value. Any well-established business will have goodwill value. Even many bankrupt businesses with zero earning power have goodwill. The name Polaroid sold for a million dollars in the bankruptcy court, and you now see Polaroid-branded televisions.
The definition of the word goodwill is: “a friendly or helpful attitude towards other people, countries, or organizations,” as defined by Collins Dictionary. A business’s reputation and good name are what allows it to grow, and without maintaining positive relationships and fostering ‘goodwill,’ no successful business would be where it is today.
Learn about goodwill in business valuations with our article, obtain a business valuation before you sell your business. Typically, the higher the cash flow, the higher the corporate goodwill valuation.
Goodwill Valuation Guide
Items that impact the goodwill of business assets include (but are not limited to):
- Company branding recognition
- Employment agreements and employment contracts
- Employee operations knowledge
- Customer relationships
- Customer base and loyalty
- Email lists
- Proprietary software
- Digital assets
- Supplier relationships
- Trade secrets
- Licenses and permits
- Training systems
Know how to choose a business appraiser for evaluating your goodwill with our complete guide on how to choose the best business appraiser.
Why is Goodwill Important in Selling a Business?
Your business is not just worth its face value. When valuing your business, using goodwill can help to achieve the most accurate terms possible, proving that numbers on paper only mean so much. Goodwill is an intangible asset versus a tangible asset.
Please read the important role of a business valuation in exit planning.
When valuing your business, including every aspect of your business will help you get the most effective asking price. The good news is, you don’t need to go at this alone: with a business valuation from the professional business appraisers at Business Appraisal FL|GA|HI, we are able to assess your goodwill and determine your business’s true value with the most accurate, objective, and fair assessment possible.
In mergers and acquisitions, determining the tangible and intangible assets of the target company is critical. Many business sales are driven by the proper allocation of goodwill.
Learn more about business valuations with our article what is a business valuation.
Business Goodwill: The Value of Brand, Customers, and Locations
Business goodwill, also known as corporate or enterprise goodwill, pertains to the business and transfers to the new owner upon the completion of a sale. It can encompass aspects such as location, employee expertise, and customer loyalty.
This type of goodwill exists no matter who owns the business, enabling its ability for consistent transferability. There are tax court decisions that separate personal goodwill from corporate goodwill.
Is your business running its operations in Florida or Georgia? Read our article about why now is the time to get a business valuation in Florida or Georgia.
How to Prove Business Goodwill with Legal Documentation
When working with prospective buyers, fostering trust, transparency, and confidence is key. Therefore, being able to prove business goodwill with financial documents, legal records, and contracts will assist you in showing solid evidence of the worth of your business goodwill. Being able to legitimize your business goodwill with concrete evidence can help to make your business more attractive to the buyer. Buyers and sellers have different views on a company’s goodwill.
Personal Goodwill: The Worth of Reputation, Relationships, and Knowledge
Professional goodwill or personal goodwill, is the goodwill that comes with the owner’s specific contributing characteristics themselves. Personal goodwill can include things like the owner’s reputation, contacts, and knowledge.
Also understand the different business valuation methods.
Understanding Pure Personal Goodwill and Transferable Goodwill
There are a couple of different ways to define personal goodwill you may encounter. These two sub-versions of personal goodwill include pure personal goodwill and transferable goodwill.
Pure personal goodwill includes goodwill that is based on a purely personal relationship that has to do with the owner. For example, this can include if the owner has specifically developed a personal relationship with a certain customer. Because the owner’s personal ties heavily influence this type of goodwill, businesses often exclude it when selling.
When selling a professional practice, it is critical that as much of the personal goodwill be transferable. Think about a medical practice and minimizing patient run-off. The goodwill allocation is critical when determining your tax liability.
Also, learn the difference between SDE and EBITDA.
Transferable goodwill – personal but transferrable to new owners during business sale, includes teachable special knowledge, contact lists, supplier relationships. It’s considered in business valuation.
You can also read our article about the rule of thumb in business valuation.
How can you make personal goodwill more transferable for the buyer?
To maximize the value of personal goodwill for your potential buyers, you can enhance transferability by documenting knowledge, training employees, and nurturing customer relationships. This will help show the prospective buyer that the personal goodwill your business has to offer is worth it, bringing more value to your business.
Know what counts as an add-back with our article understanding add-backs when selling a business.
Why is the Difference Between Personal and Business Goodwill Relevant?
In selling a business, understanding personal vs business goodwill’s tax implications is crucial. Personal goodwill is singly taxed, while business goodwill often faces double taxation. Knowing your business’s goodwill type clarifies potential income taxes.
Help your business be prepared for anything with our article disaster planning made easy.
Why Work with Business Appraisal FL|GA|HI for Your Business Valuation, Including Goodwill?
Especially in today’s highly competitive market, you cannot underestimate the importance of accurately valuing your business when you are selling it. Evaluating goodwill is an essential aspect of the valuation process, and a business valuation company like Business Appraisal FL|GA|HI will represent the true value of your business with the utmost accuracy.
Simple Goodwill Calculations versus a Goodwill Allocation Study
Simple goodwill calculators you can find on the internet may seem like a helpful tool, but they will only get you so far. With a business valuation from Business Appraisal FL|GA|HI, we will examine your goodwill with the backing and guarantee of our decades of expertise and knowledge.
Our accredited valuation analysts (AVA) perform business valuations that meet the standards set by the IRS, AICPA, and NACVA. With us, you are in good hands, and you can rest assured that your goodwill will never go undervalued.
Understand more about how a business valuation benefits you with our article about the top 7 benefits of getting a business valuation.
Ready to sell your business and evaluate your personal versus business enterprise goodwill? Reach out to BA FL|GA|HI about your business valuation today, and have a free, confidential consultation with our expert accredited analysts.