The Case of Personal Goodwill
In some cases, a company’s goodwill is personal. This is often due to a business professional building personal goodwill with customers or clients. These relationships are often built over a period of time. In these cases, the goodwill is not necessarily transferable. The business is associated with a person who is often the founder of the company. You will typically see this kind of situation with dental and medical practices, as well as law offices.
So how does personal goodwill impact the sale of the business? When you sell it might be natural that the buyer will want protection in case the business faces a downturn when the current management departs.
What can work for the buyers and sellers is for the business owner to agree to stay onboard for a designated period of time. This can help ease the transition to the new business owner. In other cases, the buyer and seller arrange an “earn out.” Any lost business is factored at the end of the year, and then this percentage is subtracted from the amount owed to the seller. In some cases, funds are placed in escrow and adjustments are made depending on the performance of the business.
If you are buying or selling a business that involves personal goodwill, your situation may be different from that of the majority of businesses. However, an M&A advisor can guide you through the process and ensure all parties are satisfied.