Personal Goodwill vs. Corporate Goodwill
Posted by Kipp Krukowski on Wed, Dec 15, 2010 @ 01:48 PM
The sale of a privately held business can be structured in one of two ways; the buyer can acquire the stock of the selling company or the assets of the selling company. Most business sales are asset sales as opposed to stock sales. Many times the value of a business sale exceeds the value of the assets being purchased; the additional value of the business sale, beyond the asset value, is classified as goodwill.
One of the best kept secrets in business sales is the concept of personal goodwill. There is legal precedence and solid case law that the goodwill portion of a business sale can be partially attributed to the business owners individually as opposed to the company. This personal goodwill can be taxed at a much lower rate than the goodwill sold by the company.
A good example where there could be the sale of personal goodwill would be the sale of a professional practice such as an insurance agency. One of the key’s to structuring a sale with personal goodwill is that much of the relationships of the business relate to the principals of the business and not the business itself – this is particularly the case with professional advisors like accountants and insurance agents. An example would be an insurance agency with assets of $25,000 such as computers and desks, and a sale price of $250,000. There could be a good case for breaking up the $225,000 worth of goodwill into partially corporate goodwill and partially personal goodwill. The goodwill allocated to the owners as personal goodwill would likely be taxed at a much lower rate than the goodwill allocated to the company.
There are several steps that business owners need to take to set the stage for selling personal goodwill. Pre-sale planning for a small business sale is critical and it can save tens of thousands of dollars in tax. A team of advisors preparing a business sale need to set the stage for selling personal goodwill several years before the business sale takes place. There are also some very specific contracts and legal details that must be addressed by a qualified business attorney and tax advisor when structuring a business sale to include the sale of personal goodwill.
Confidential Business Sale, Inc. does not provide legal or tax advice but we can help coordinate the process of preparing a business sale and setting the stage for using the personal goodwill strategy, contact us for more information.
Written by: Kelcey Lehrich, Business Intermediary, Confidential Business Sale, Inc.
