Personal versus Enterprise Goodwill in a Business Sale
Goodwill can exist in two different forms:
- Personal Goodwill, which is defined as an intangible asset that is attached to a person; and
- Enterprise Goodwill, also an intangible asset that is attached to a business enterprise.
If goodwill is attached to an individual, it is non-severable since the person to which it is attached is not being sold. This also implies that the asset is non-transferable. Of course we often establish contractual arrangements between the parties to lessen the non-transferable portion of personal goodwill to some degree. The ability to pull this off depends on the size and nature of the business being transferred. Smaller businesses tend to have more personal goodwill due to the owner’s personal contact with customers or channel partners, or unique skills (e.g. a chef in a restaurant operation, a surgeon, etc.).
With enterprise goodwill being attached to the enterprise, this asset is indeed transferable because it is a part of the business being sold. So it may be obvious that enterprise goodwill usually transfers to the buyer without special arrangements. Personal goodwill, on the other hand, requires much deeper analysis to determine how and how much of this intangible asset is reasonably transferrable to a willing buyer.
Enterprise goodwill has transferable value, whereas personal goodwill may or may not have transferable value.
Without proper analysis of goodwill value, whether or not it is related to an individual (usually the owner), and thoughtful strategies for the transfer of the personal goodwill component, the value of a business can be significantly distorted (diminished).