Personal Goodwill: What if the Owner IS the Business?

 

The personal goodwill of the owner has a significant impact on the sale of many small- to medium-sized businesses.  How the owner’s personal goodwill is transferred to a buyer is a challenge for both buyer and seller. 

An owner’s personal goodwill usually comes about through:

  • A positive personal reputation and history of honesty, integrity, fair-dealing, etc.
  • A reputation for excellence in the profession or business, or a unique talent or skill set.
  • Personal relationships with customers and/or suppliers, especially larger customers and key suppliers.
  • A network of relationships that recommend the business to potential customers.

It can be difficult to sell a business, regardless of size, where personal goodwill is central to the business’ success.  A buyer needs to take the seller’s personal goodwill into account when considering whether to buy such a business.

Businesses centered on the goodwill of the owner can certainly be sold, but usually the buyer will want some protection in case business is lost with the departure of the seller.  Several methods can reconcile the buyer’s and seller’s interests in this area:

  • The seller may agree to stay for a sufficient period after the sale to allow him/her to work with the new owner and slowly transfer the goodwill.
  • Some form of “earnout” may be used.  At the end of a period of time, any lost business that can be attributed to the goodwill of the seller is calculated and the sale price is adjusted accordingly.
  • A seller may hire and groom a key employee with the aim of having that employee phase into ownership over time.
  • The seller may sell a portion of the business, essentially taking in a partner, with the understanding that the buyer will ultimately buy out the original owner.  During the time of the partnership, the buyer would, with the help of the seller, develop his/her own goodwill in the business.
  • Favorable tax benefits may be a factor.  If the seller of the business also owns the personal goodwill, the sale can essentially be two taxable events.  The seller’s tax professional will be able to give further advice on this matter.

In a business where one of the most valuable assets, the owner, goes home every night, there are many challenges to the sale of the business and many risks for a buyer.  An experienced business broker can often help balance the buyer’s and seller’s interests and reach a satisfactory agreement.