Personal goodwill relates to the intangible skills, ability, contacts, experience and reputation related to particular individuals within business. It resides and owned by individuals with non-transferrable items & has no or little commercial value attached. Any business runs on its services or product however if the owner is connected with customers in personal way delivering quality service, driving revenue growth, etc., than this personal good will is tied to the owner.
Small businesses are usually operated by owners who personalize their relationship for e.g. tax advisors, doctors, dentists, legal practices, accountants, attorneys and other personal service providers. With right skills and attitude this can impact the sale of many small to medium size businesses. Local businesses can have larger impact with unique capabilities to attract customers and industry reputation as large.
These business centred on goodwill are sold with buyer taking some protection in case business doesn’t perform as well. There are ways by which this goodwill is protected like signing a non-compete while transferring the ownership rights or allowing the owner to stay with business for some time so that to allow him sufficient period for business to pay dividends. Sale of assets and personal goodwill is to be treated separately from seller’s point of view.
Another interesting form of approach is business earn out, at the end of financial year the difference marks the value of the personal goodwill which are then adjusted with owner for money. Agreements that are signed before transaction need to clearly mention the acquisition of the personal goodwill as another asset and role he has to perform so that seller’s goodwill gets transferred to business goodwill. Now evaluating fair market value for this personal goodwill can take more time than usual in accordance with the business running. Independent appraiser assistance is taken for coming up with fair market value for seller’s personal goodwill.