3.16: Conditionally transferable goodwill
Conditionally transferable goodwill is goodwill that theoretically could transfer but which requires a carefully managed process for the transfer to be successful.
Conditionally transferable goodwill refers to goodwill in a business that is not wholly personal to the owner-manager’s skills and personality, but which is historically somewhat dependent on the owner-manager. Typically, this most often relates to personal relationships with customers, suppliers, and employees, as well as the efficient management of a system in place.
The value of conditionally transferable goodwill should be included in the calculation of the fair market value of the business, but the CBV should consider discounting the goodwill value for the risk of an incomplete transfer.
Conditionally transferable goodwill carries transaction risk – it could be lost or diminished if the transaction is poorly executed.
The actual transfer of conditionally transferable goodwill is dependent on the cooperation between the seller and the buyer (or notional buyer if the valuation is not for an actual transaction) before and after the sale closes. The seller and the buyer (with the help of the CBV) should identify the source of the goodwill and develop a plan whereby its transfer can be appropriately managed. It would be helpful if the purchase and sale agreement details (a) the mechanism whereby the goodwill will transfer and (b) the recourse available to the buyer in the event of an incomplete transfer. This usually requires a continuing role in the business for the seller for a specified period, or until specified targets are reached.
Contact MVI for assistance in understanding the how much of the goodwill in your business may be separately identifiable and transferable.