In a significant move last year, the NCAA decided to allow individual athletes to profit from their own name, image, and likeness. While you may not be a superstar on the court, you might be able to “bank” on your name, too. If you’re a business owner, it’s a worthwhile consideration because it can drive up the value of your business while driving down taxes when it comes time to sell. This portion of your business value is an intangible asset called personal goodwill. Generally speaking, personal goodwill includes the professional reputation, relationships, technical expertise, and other abilities and qualities that a business owner has contributed to help their company succeed.
This intangible asset was first recognized in 1998 as part of a federal tax court case involving a lovable character named Arnold Strassberg, an ice cream distributor who helped get brands like Haagen-Dazs and Borden onto supermarket shelves. Strassberg was in high demand for decades as the man who “sparked a revolution in the retail sale of ice cream” and was even forbidden by Haagen-Dazs to work with Ben & Jerry’s when they came knocking, looking to tap into his sales magic, too. When it came time to sell the business, real questions arose on whether some of the value of the business belonged to the company or to Strassberg himself.
When you’re able to determine the value of your own personal goodwill, you essentially sell it apart from the business itself. Gains from that sale, then, can be taxed at a different (usually lower) taxable rate. Ideally, that portion of the deal is taxed as long-term capital gains instead of ordinary income. In recent years, the concept of personal goodwill has been used not only in business sales but also for inheritance purposes (affecting gift and estate taxes) and even in valuing a business as a dividable asset for marital dissolution (divorce). Valuation expert Alina Niculita offers an excellent overview of personal goodwill here.
It’s essential to work with a business valuation expert with experience working with business owners like you. (If you’re not sure where to find such people, feel free to ask us.) Here’s why:
“While regulators and courts long ago blessed the fundamental concept of personal goodwill—that some portion of the overall value of an enterprise may belong to an individual shareholder rather than to the company itself—they have historically set a high bar for those who wish to claim it,” explains valuation expert Doug Peterson.
Every business owner has some personal goodwill wrapped up in their business. The longer you’ve owned your business, the more involved you are in the sales and the relationship-building between clients, customers, and even vendors, the more personal goodwill you may be able to claim. Be sure to acknowledge your own star power when the time comes. It’ll sweeten the deal for both you and those who buy or inherit your beloved business.