Such an exercise is extremely valuable if the personal goodwill of a spouse was acquired or accumulated prior to marriage (e.g., inheritance). In the context of marital dissolution (divorce), the assessment of personal versus enterprise goodwill has historically been common, as such assessment was used to segregate and quantify the marital (community) versus separate (personal) assets. Essentially, personal goodwill is an asset owned by the individual, not the business itself, for tax purposes. These personal characteristics and relationships help create a customer base, drive revenues, and give the business the ability to profit. Personal goodwill is a set of characteristics owned by an individual - usually the business owner or key employee/shareholder of the company - including but not limited to personal relationships, personality, reputation, experience, industry knowledge, and skills. Essentially, enterprise goodwill exists regardless of who owns or operates the business, and therefore can be transferred to any buyer. Most common examples include yet-to-come technology, yet-to-come customers, synergies with buyers, and, within a financial reporting context of a business combination, the assembled and trained workforce. Generally Accepted Accounting Principles (GAAP) Accounting Standards Codification 805, Business Combinations (‘‘ASC 805’’), does not separate (or delineate between) enterprise and personal goodwill.Įnterprise goodwill is a set of business entity-owned characteristics that is transferable to a new owner upon a merger or sale. It’s important to note that goodwill for financial reporting under U.S. Hereinafter, this discussion will refer to goodwill as, (1) attributable to a company as enterprise goodwill, and (2) attributable to an individual as personal goodwill. Goodwill for tax purposes can be delineated further, between enterprise goodwill (also known as corporate, institutional, or business goodwill) and personal goodwill (professional, individual, or celebrity goodwill). Technology-related: patents, developed technology, in-process research and development (IPR&D).Customer-related: customer lists and relationships.
Marketing-related: trademarks and brands.The International Glossary of Business Valuation Terms defines goodwill as ‘‘that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factor not separately identified.’’ 1 Intangible assets separable from good-will generally fall within five categories shown below, along with examples of each: In order to take advantage of such potential tax savings, Seller needs to take steps before and during the Transaction to identify personal goodwill, and ensure that Seller has rights to sell it and that such asset has been valued and documented appropriately to support any claims with the IRS and the Tax Court. However, if certain criteria are met before the Transaction closes, Seller can often significantly reduce the tax liability from the sale of the business by selling the personal goodwill associated with the business separately from the business’s assets. If not planned appropriately, Seller may be liable for taxes based on the proceeds from sale that are double taxed. This is especially true for a closely held C corporation when the proposed deal structure is an asset sale (the ‘‘Transaction’’). In the News: Guess Who Has A Booming Online Business? Goodwill ().The sale of a business warrants some of the most important tax and estate planning an owner (‘‘Seller’’ or ‘‘Shareholder’’ as used interchangeably herein) may ever need.
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