Business, Institutional, or Corporate goodwill and Personal Goodwill can be an important breakdown of the intangible value of the micro or small business.  The brief video above explains the differences quite clearly. 

A summary of key distinctions are below.

For most small businesses goodwill is the classification used on the balance sheet to show intangible asset value.  The intangible asset value formula is below.

Value of the Business – Value of Tangible Assets = Goodwill or Intangible Asset Value

Tangible assets are cash, equipment and plant, accounts receivable, and other tangible things or assets.  Intangible assets is the value created by the cash flows that are above the value of the tangible assets.

Goodwill is broken down into two broad classifications.  Business, Corporate, or Institutional and Personal Goodwill.  The concept is that the goodwill that a business has can be solely attached to the business or it can be attached to a key person, usually an owner.

This is typically determined by a weighting of attributes that indicate who really owns or controls the relationship.  Extreme examples are a McDonald’s restaurant where no one cares about the franchise owner, the franchise system has all the goodwill.  That is all corporate goodwill.  The other extreme is an exceptional surgeon where everyone only wants her even if she is in a large practice.  That is personal goodwill.  Many small businesses have a mix of the two goodwills.

Personal goodwill can further be broken down into transferable goodwill which will transfer with non-compete agreements and a transition plan and pure personal goodwill that is really not transferable at all.

Personal goodwill is important in many states in business valuations for divorce as often the personal goodwill is not part of the marital estate.  It also has application in estate and gift tax matters and other Federal Tax or IRS situations.

Clearly, business valuation is quite technical.  To learn a little more, download the e-book “7 Things to Know About Business Valuation“  – and then connect with Greg if you have any questions about a business valuation for you or your clients

Greg is a Partner at Harvest Business Advisors where he has valued and brokered hundreds of small and mid-sized businesses.   As Editor-In-Chief of “Around the Valuation World,” a monthly webinar for the National Association of Certified Valuators and Analysts (NACVA), he is in the forefront of current business valuation practices.