BVWire readers weigh in on the definition of personal goodwill

BVWireIssue #175-2
April 12, 2017

During a recent webinar on the double-dip phenomenon in a valuation for divorce, one of the speakers, Rob Levis (Levis Consulting), pointed out that there’s no official definition of “personal goodwill.” He pointed out that it does not show up in the “International Glossary of Business Valuation Terms.” “You can find goodwill, but not personal goodwill,” he noted. It’s also not in the glossary from the International Valuation Standards Council.

In BVR's Guide to Personal v. Enterprise Goodwill, 5th edition, the chapter’s author, David Wood (Wood Forensic/Valuation Services), famous for his MUM framework for estimating personal goodwill, offers his definition:

Personal goodwill is the value of earnings or cash flow attributable to attributes of the individual that results in earnings from consumers that return because of the individual, in earnings from new customers who seek out the individual, and in earnings from referrals made to the individual.

Some BVWire readers offered up their suggestions for defining the term. “In my opinion Wood's definition is inadequate,” says Bob Dohmeyer (Dohmeyer Valuation Corp.). “You can't ‘define’ ‘personal goodwill’ or even begin understanding the concept without first discussing market compensation for ‘the individual’ in his definition. Further, you can't define it without breaking it down to ‘transferable’ versus ‘non-transferable’ personal goodwill along with the non-compete issue that impacts transferable personal goodwill.” He refers readers to an article from Stout Risius Ross.

From Australia, Simon Cook (Lotus Amity Forensic Accounting) offers this from the Federal Court of Australia: Federal Commissioner of Taxation v Krakos Investments Pty Ltd (1995) 61 FCR 498; 32 ATR 7, as summarized in “The meaning and nature of goodwill in the tax context” (Ian Tregoning): “Personal goodwill. Depends on the personal characteristics of a person or persons associated with the business. It is these personal qualities which attract the customers.”

During a recent four-hour workshop on personal versus enterprise goodwill, Jim Alerding (Alerding Consulting LLC) acknowledged that there’s no official definition but remarked that it was not really pertinent. “I think we have our own discussions and determinations of what personal goodwill is as opposed to enterprise goodwill,” he says. “There are a lot of definitions of things that valuation experts do that are not in a glossary.”

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