Goodwill Valuation

In many situations, most notably valuation for marital dissolution and allocation of purchase price for tax or financial reporting purposes, distinguishing personal goodwill from enterprise goodwill and other enterprise-level intangible assets is a critical undertaking.

In the marital arena, personal goodwill is not a divisible asset in some jurisdictions – and the status is uncertain in many – and therefore cannot be awarded by the Court.  It is curious that many valuation analysts fail to provide evidence as to the separate values of personal and enterprise goodwill.

In tax planning, particularly for C Corporation asset sales or conversions to S Status, allocating the proceeds of a sale of a business to personal goodwill and/or a noncompete agreement, consistent with the Tax Court decisions in Norwalk, Martin Ice Cream and the important 2008 Derby case, can reduce the amount recognized as corporate gain and the related corporate level tax. In fact, Derby arguably makes consideration of the value of personal goodwill and a noncompete de rigeur in the valuation of a physician practice being acquired by a hospital.  In valuation for purposes of a sale of a business, properly attributing value to different intangible assets is critical to both buyer and seller obtaining the proper measure of the bargain.

There are two fundamental issues in differentiating personal from enterprise goodwill: identifying which portions of cashflow are attributable directly to the individual’s characteristics and identifying which cashflows attributable to otherwise enterprise-level tangibles and intangibles would be lost if the individual competed.This makes the determination of reasonable compensation for the owner-employees of the business the single most critical aspect of valuation of goodwill. Mark contributed the most comprehensive work (27,000 words) on this topic to the new BVR/AHLA Guide to Healthcare Industry Compensation and Valuation, published in November 2012.

We have a comprehensive approach to these issues that was the subject of a paper written by Mark O. Dietrich, CPA/ABV in the AICPA’s Spring 2005 CPA Expert and was presented at a number of seminars and Conferences during 2005, including the joint AICPA/ASA National Business Valuation Conference in November and the Virginia Society of CPAs Business Valuation Conference in September.  Mark also developed a one-day continuing education course on how to distinguish personal and enterprise goodwill. The 3rd Edition (2012) of the Guide to Healthcare Valuation (see our Publications page) contains several chapters devoted to the valuation of  personal and enterprise goodwill.