3.14: Personal goodwill
Personal goodwill arises from attributes that are embedded in one individual (usually the owner/manager). These are attributes that cannot be transferred. In most cases the goodwill arises from skills developed through education and experience.
Personal goodwill is excluded from the fair market value of a business.
As an example, compare a specialist physician’s practice to a general practice. The value of both practices will be a function of both tangible assets and goodwill.
Theoretically the specialist’s practice is worth considerably more than the GP’s given that the specialist can charge much higher fees.
However, the specialist’s practice is wholly reliant on his or her skills whereas the GP’s practice is more likely based on the patient list and other factors that are less dependent on the owner/manager. It is possible that all the goodwill in the specialist’s practice is personal and therefore cannot be transferred.
If it cannot be transferred it will be omitted from the fair market value of the practice. In this case it is quite possible that the GP’s practice will have a higher transferable value than the specialist’s. (This is an issue that can present a major challenge in divorce cases. A valuator will look to the judge for direction on how to treat personal goodwill. It illustrates why there needs to be a balance between the fair value of the asset and deemed income for future spousal support).
Contact MVI for assistance in understanding the how much of the goodwill in your business may be personal and the extent to which it may be transferable.