Purchase price represents only one measure of a successful business sale. Sellers should also consider how transaction structure affects their after-tax proceeds. For certain owner-managed businesses, personal goodwill in a business sale may create a valuable tax planning opportunity. However, the facts must support its existence and individual ownership.

Goodwill represents intangible value beyond a company’s identifiable assets. Customer relationships, reputation, expertise, and industry connections may all contribute to goodwill. Typically, the company owns much of this value. In some businesses, however, a portion may belong personally to the individual shareholder. This distinction matters because personal goodwill represents an asset owned by the individual rather than the corporation. Therefore, the individual may sell that goodwill directly to the buyer.

The potential tax benefit may become particularly significant when selling a C corporation. An asset sale may otherwise expose proceeds to both corporate and shareholder taxation. When properly structured, proceeds allocated to personal goodwill bypass the corporation. Instead, the shareholder receives consideration directly for an individually owned asset. The shareholder may also receive long-term capital gain treatment when applicable requirements are satisfied. Meanwhile, the buyer generally receives an amortizable intangible asset.

Still, personal goodwill cannot simply be created during negotiations. It must exist before the transaction and remain owned by the individual. Several factors may support personal goodwill in a business sale:

• Personal Relationships: Customers, suppliers, or referral sources have meaningful relationships with the individual owner.
• Reputation and Expertise: The owner’s reputation, knowledge, or experience contributes directly to the company’s success.
• Individual Ownership: The individual, rather than the corporation, owns the goodwill being transferred.
• No Employment Agreement: The owner has not transferred personal goodwill through an employment agreement with the corporation.
• No Noncompete Agreement: The owner has not transferred personal goodwill through a noncompetition agreement with the corporation.
• Supportable Valuation: A qualified valuation establishes a reasonable allocation between personal and enterprise goodwill.

These requirements make early planning essential. Sellers should determine whether personal goodwill exists before negotiating the transaction structure with prospective buyers. A valuation professional may then quantify the personal goodwill when the facts support it. The transaction documents should also clearly reflect the ownership and transfer of that asset. At the same time, the seller’s tax advisor and transaction attorney should evaluate the proposed structure. The M&A advisor may coordinate these considerations with the broader transaction economics.

Personal goodwill in a business sale will not apply to every transaction. However, qualifying owners should evaluate the opportunity before entering the sale process. When properly supported and structured, personal goodwill may reduce tax exposure and increase the seller’s after-tax proceeds.

SOURCES:

https://www.foxfin.com/personal-goodwill

https://www.thetaxadviser.com/issues/2015/apr/tax-clinic-07-apr-2015/