Personal Goodwill & Enterprise Goodwill

Personal Goodwill & Enterprise Goodwill

We receive many questions about enterprise value when the enterprise may be entirely dependent on a single person for continued success.  So, when we are asked to assess the difference between personal goodwill and enterprise goodwill what should we consider?  The following describes attributes that could be important in segregating value between a person and an enterprise.

Personal goodwill is directly associated with an individual.  Consumers seek out the individual, are referred to the individual, or repeat patronage due to the individual.

Enterprise goodwill is directly associated with the business.  Consumers seek out the enterprise, are referred to the enterprise, or repeat patronage due to the enterprise.

Personal Goodwill

  • Ability, Skill, and Judgment
  • Work Habits
  • Age and Health
  • Personal Reputation
  • Personal Staff
  • Personalized Name
  • Marketing and Branding
  • In-bound Referrals
  • Closeness of Contact
  • Important Personal Nature
Enterprise Goodwill

  • Business Reputation
  • Business Staff
  • Business Name
  • Business Location
  • Multiple Locations
  • Marketing and Branding
  • Systems and Organization
  • In-bound Referrals
  • Recurring Revenue Stream
  • Copyrights, Patents, Processes, Etc.

Some attributes are clearly personal or enterprise while others are more nuanced.  The table below expands on goodwill attributes and suggests characteristics that would segregate value to either personal or enterprise.

 

 

The Tax Court has considered personal and enterprise goodwill.  The Martin [1] case lends guidance to the personal goodwill identification issue.  The Tax Court approach, considers the following:

  • Describe the relationship between customers or suppliers and the person.
  • Do these relationships persist without a formal contract?
  • Does the personal reputation and industry perception provide a benefit to the business?
  • Are the practices of the person innovative or distinguishable and regarded as adding value to the industry?
  • Is the person under any employment agreement or covenant not to compete with the business?

The personal goodwill issue often arises in professional practices.  Lopez v. Lopez [2]  suggests several factors that should be considered in the valuation of personal goodwill.

The person’s:

  • Age and health;
  • Demonstrated earning power;
  • Reputation in the community for judgment, skill, and knowledge;
  • Comparative professional success
  • Nature and duration of practice as a sole proprietor or as a contributing member of a partnership or professional corporation.

It is important to understand that accounting and tax rules follow cash and do not segregate value except for compensation.  Another goodwill question to explore: is compensation alone sufficient to retain and motivate?  Or is the person relying also on “equity” returns for retention and motivation?

Every situation is unique and requires investigation and analysis.  Please call David Adams at Adams Capital 770-432-0308 to discuss how the Adams Capital team assists with making informed decisions about the differences between personal and enterprise goodwill.

[1] Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998).

[2] Marriage of Lopez, 113 Cal. Rptr. 58 (38 Cal. App. 3d 1044 (1974).