Personal goodwill can have an impact on businesses. Understanding the cultivation of goodwill is of great value for any company.
A founder builds one or more of the following during the process of building a business:
- A positive personal reputation.
- A personal relationship with key players such as large customers and suppliers.
- The founder’s reputation associated with the creation of products, designs, inventions and more.
What Creates Personal Goodwill?
There are many ways to establish personal goodwill. For example, professionals such as lawyers, doctors and dentists can build personal goodwill with their clients. One aspect of building personal goodwill is that it is non-transferable. It is always attached to and associated with a particular key figure. Personal goodwill can be a dominant force, but it does have a considerable drawback. The goodwill goes home at night.
How Does It Impact Buying or Selling a Business?
There are some obvious risks when buying a business where personal goodwill has been a foundation of a business’s success and growth. It can be difficult to sell a business where personal goodwill plays a key role in the business. A buyer must take this important factor into consideration. Businesses such as medical, legal practices or accounting firms depend on existing clients. These clients may go elsewhere if they don’t like the new owner.
It is possible to sell a business built around personal goodwill. Usually buyers will want some protection if the business faces serious problems when the seller departs.
Solutions that Work for Both Parties
Require the seller to stay with the business and remain a key public face for a period of time. A transition period can be pivotal for businesses built around personal goodwill. Have some form of “earn-out”. One option is to subtract a percentage of the lost business from the monies owed to the seller. Another option is to place the funds from the down payment in escrow and then make adjustments to those funds. The courts have decided that a business does not own the goodwill, the owner of the business does.
Businesses where personal goodwill plays a major role, presents their own unique challenge.