Top 5 factors how personal goodwill can impact the business value

2 min read

Personal goodwill and commercial goodwill are two different types of goodwill that can exist in a business. Personal goodwill refers to the value that is attributed to the business due to the reputation, skills, and relationships of the owner. Commercial or business goodwill, on the other hand, refers to the value that is attributed to the business due to the reputation, skills, and relationships of the employees or the company as a whole.

From a small business owner’s perspective, the main differences between personal and commercial goodwill are:

1. Dependence: Personal goodwill is heavily dependent on the owner, whereas commercial goodwill is more dependent on the business itself. If a small business owner with personal goodwill leaves the business, the value of the business may decrease significantly. Commercial goodwill, however, is not as dependent on any single individual and can continue to provide value even if key employees leave.

2. Transferability: Personal goodwill is not easily transferable to a new owner, whereas commercial goodwill is more transferable. This means that if a business with personal goodwill is sold, the new owner may not be able to benefit from the value attributed to the previous owner. A business with commercial goodwill, on the other hand, can continue to provide value to a new owner as the reputation, skills, and relationships of the company and its employees are transferable.

3. Durability: Personal goodwill may not be durable over the long term, whereas commercial goodwill is more durable. As the owner of a small business, the owner’s reputation, skills, and relationships may change over time, which could impact the value of the business. Commercial goodwill, however, is more durable as it is based on the reputation, skills, and relationships of the company and its employees, which are less likely to change over time.

4. Valuation: Personal goodwill is not always easy to value and may not be recognized in a business valuation, whereas commercial goodwill is more easily valued. When valuing a business, personal goodwill may not be considered as it is not easily transferable and may not be durable over the long term. Commercial goodwill, on the other hand, is more commonly recognized and valued in a business valuation as it is more transferable and durable.

5. Impact on Sale: Personal goodwill can negatively impact the sale of the business as the buyer may not be willing to pay for something that is not easily transferable and durable. Commercial goodwill, however, can enhance the value of the business and make it more attractive to potential buyers.

It’s important to note that the presence of personal goodwill in a business does not necessarily mean it will negatively affect the value of the business or the business is not salable. The business owner should consult with a business valuation professional to understand the personal and commercial goodwill that exists in his business and how to maximize the business value.  

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