Summary
This goodwill valuation guide discusses the difference between valuing personal goodwill and company or enterprise goodwill. Knowing the market value of goodwill is critical for tax purposes even if you own a C corporation.
Personal vs Business Goodwill: What You Need to Know When Selling a Business
A Personal Goodwill Valuation Guide
Valuing Business Goodwill versus Personal Goodwill
When selling a business, every aspect of the business must be considered. A business is much more than just numbers on paper, and the presence of goodwill exemplifies this. However, a business entity has two types of goodwill: personal and enterprise or business. Knowing the difference can keep you from the tax court or make a fair divorce settlement.
While dealing with goodwill, you will encounter personal goodwill and business goodwill. It is essential to understand the difference between the two. This article will explore how goodwill is defined, why it is important, and the differences between personal goodwill and business goodwill.
The Value in Reputation: How is Goodwill Defined in Business?
Goodwill in business is defined as an intangible asset calculated and included as part of a business’s value when sold. It increases a business’s purchase price and helps 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 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 allow 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. 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):
- Reputation
- 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 to evaluate 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 will help you get the most effective asking price and save on taxes. 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 can assess your goodwill and determine your business’s true value with the most accurate, objective, and fair assessment possible.
Determining the target company’s tangible and intangible assets is critical in mergers and acquisitions. The proper allocation of goodwill drives many business sales. You will hear the terms personal and enterprise 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. The Internal Revenue Service IRS can scrutinize your goodwill allocation, which must be substantiated, or you could visit the tax court.
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
Fostering trust, transparency, and confidence is key when working with prospective buyers. Therefore, proving business goodwill with financial documents, legal records, and contracts will assist you in showing solid evidence of its worth. Legitimizing your business goodwill with concrete evidence can help 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 goodwill that comes from the owner’s specific contributing characteristics. Personal goodwill includes the business owner’s reputation, contacts, vendor relationships, customer patronage, and industry knowledge. The employment agreement and covenant not to compete are designed to help convey personal goodwill to the new owners as enterprise goodwill. We are also trying to minimize blue sky value in the eyes of the buyer and create tax savings.
Also, understand the different business valuation methods.
Understanding Pure Personal Goodwill and Transferable Enterprise Goodwill
You may encounter a couple of different ways when defining personal goodwill. These two sub-versions of personal goodwill include pure personal goodwill and transferable goodwill.
Pure personal goodwill includes goodwill based on a purely personal relationship with the business owner. For example, this can include whether the owner has developed a personal relationship with certain customers or a key vendor. Because the owner’s personal ties heavily influence this type of goodwill, businesses often exclude it when selling. as part of the intangible assets.
Selling a Professional Practice
When selling a professional practice, much of the personal goodwill can be transferable enterprise goodwill. Consider a medical practice and minimizing patient run-off. The allocation of goodwill is critical when determining your tax liability.
Also, learn the difference between SDE and EBITDA.
Transferable goodwill can be personal, but transferrable to new owners during the business sale. It includes teachable special knowledge, contact lists, supplier relationships, and how it is considered in business valuation. How the different classes of goodwill are treated is critical for your capital gain calculation.
Personal versus Business Goodwill in a Divorce
In addition, 35 states are personal goodwill states where personal goodwill in a business is not part of the marital assets. Your divorce attorney should know your state law regarding personal versus business goodwill.
Many states, through statute or case law, provide guidance on the proper business valuation methods in divorce cases.
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 your business’s personal goodwill 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. Also, understand how a covenant is not to compete and how an employment contract can be structured for your tax benefit.
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 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 your business’s true value with the utmost accuracy.
Please read what should be included in a business valuation whether for an asset sale or stock sale.
Simple Goodwill Calculations versus a Goodwill Allocation Study
Simple goodwill calculators you can find on the internet may seem helpful, 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 IRS, AICPA, and NACVA standards. You are safe with us, and you can rest assured that your personal goodwill will never be undervalued and allocated correctly based on court cases, your overall fair market value, and purchase price allocation.
Understand more about how a business valuation benefits you with our article about the top 7 benefits of getting a business valuation for business owners and their personal and enterprise goodwill allocation needs.
Ready to sell your business and evaluate your personal versus business enterprise goodwill? Contact BA FL|GA|HI about your business valuation today, and have a free, confidential consultation with our expert accredited analysts.