When valuing a business, it’s essential to distinguish between different types of goodwill—particularly between business goodwill and personal goodwill. This distinction is crucial, especially for small, owner-operated businesses, which form a significant portion of New Zealand’s economy. In this article, we explore what personal goodwill is, why it matters, and how it impacts the valuation of a business.

Business Goodwill vs. Personal Goodwill

Goodwill represents an intangible asset that adds value to a business. However, not all goodwill is transferable. Business goodwill is the part of goodwill that is transferable along with the business, meaning it is not dependent on any one individual. In contrast, personal goodwill is derived from the skills, expertise, and relationships of the business owner.

Business Goodwill

For goodwill to be valuable in the context of a sale, it must be transferable with the business. Business goodwill includes elements like brand recognition, customer loyalty, and established operational systems that are independent of the owner.

Personal Goodwill

Personal goodwill is linked directly to the owner’s individual reputation, skills, and relationships. It may include relationships with key clients, staff, suppliers, or other stakeholders. This type of goodwill is not easily transferable, as it is heavily reliant on the owner’s personal involvement.

Indicators of Personal Goodwill

Personal goodwill is most prevalent in small, owner-operated businesses with limited reliance on tangible or established intangible assets. Here are some key indicators:

• The business is highly dependent on the owner’s personal skills and relationships.
• There is an absence of formal contractual relationships with key stakeholders.
• The business is small and entrepreneurial, with limited investment in tangible or identifiable intangible assets.
• It relies heavily on the owner’s personal referrals and relationships to generate business.

Personal goodwill tends to diminish as the size of the business increases. Larger businesses often have multiple management layers, formalized systems, and contractual relationships, reducing dependency on the owner’s influence.

Importance of Recognizing Personal Goodwill

Recognizing the presence of personal goodwill is vital when valuing small to medium enterprises (SMEs). Many SMEs are highly reliant on the business owner’s personal attributes, and ignoring this factor can lead to an unrealistic valuation. The presence of personal goodwill means that valuers need to look beyond the business’s revealed earnings and consider the ‘people’ factors to produce a credible and defensible valuation.

Final Thoughts

Personal goodwill is an important consideration in business valuation, particularly for small, owner-operated businesses. Understanding whether goodwill is transferable (business goodwill) or reliant on the owner’s skills and relationships (personal goodwill) helps ensure a more accurate and realistic valuation. For those looking to sell or buy a small business, recognizing the role of personal goodwill can provide valuable insight into the true value of the business.

For more insights into business valuation and understanding the factors that drive value, visit Bizstats.report.