Business Valuation: What Is Personal Goodwill and Why Do You Care?

by | Jul 28, 2018 | Business Valuation

Personal goodwill identified in business valuations can substantially change your outcome in C corporation sale or merger income tax situations, certain estate tax situations, and in many divorce situations.

For accounting purposes, business goodwill is the value of the company beyond the tangible assets.  Tangible assets are things like bank accounts, trucks, equipment, and furniture.  If you have a company worth $100,000 that has one bank account of $15,000 and a truck worth $10,000 and no other tangible assets or liabilities then the goodwill is $75,000.

In other words, Goodwill is the intangible value of the company due to the company’s perceived ability to make money.

For many companies goodwill can be further broken down to goodwill of the company or enterprise goodwill; and the goodwill of the owner or personal goodwill.   A business customer may choose the business mainly because of the owner or  mainly because of the business’s other features.  For example a skilled heart surgery practice built around a famous surgeon will have mainly personal goodwill (people want that surgeon). Whereas no one really cares who owns a McDonald’s Restaurant therefore the McDonald’s has enterprise or corporate goodwill.

There are two big reasons why corporate vs. personal goodwill is important to you and your business valuation.

The first reason why the distinction between personal goodwill and enterprise or corporate goodwill is important is that in certain state’s divorce laws (certainly Maryland, New Jersey, and Virginia) personal goodwill is not part of the marital estate and not split in the divorce.  This can have a huge impact on the findings related to the business value and on the division of assets between the spouses.

The second reason why corporate vs. personal goodwill is important is that for federal tax purposes particularly when C corporations are being sold in asset sales and for estate and gift tax reasons personal goodwill may be owned by the individual and often is taxed at lower (or even no taxation in the case of some estate and gift tax court rulings) net rates to the owner/seller than enterprise goodwill will be taxed to the corporation.    The net effect is a finding of personal goodwill could save you a lot of tax dollars.

These are both technical areas of the law so please check with us at Harvest  and your attorney or advisor to see if these situations may apply to you.

While always an area with some grey areas quality business valuation analysts know how to calculate corporate and personal goodwill.

 

Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.