“I only shop here because you are the owner, John. If you ever leave, I’m going elsewhere.”
Personal goodwill is the value that is attached to an individual person within a business. It is based on relationships, reputation, expertise or specialised skill that are personally attributed to an individual rather than the business as a separate entity.
Typically, this is the owner of the business and is easy to understand when thinking about a sole practicing accountant. It’s likely that a sole practitioner would have strong personal relationships with clients and referrers that have been built up over time. These relationships would be more important for the sole practitioner than it would for a larger accounting firm such as Moore, where the brand of the firm can have a greater influence on why a potential client or referrer might use its services.
Strong personal goodwill is an excellent attribute to have when running a business. It means you’ve built a great reputation and theoretically generate work simply by being who you are. However, it is not such a great characteristic when selling a business.
From a buyer perspective, if the goodwill in a business is predominantly the personal goodwill of the current owner, and they are not planning to transition through an acquisition, then the buyer may see this as a negative as they are receiving the goodwill as part of the purchase.
In this case, a buyer may not want to pay the same price as if they were acquiring all the goodwill of the business. Personal goodwill is worth less than business goodwill in a transaction.
Can you change the relationship of personal goodwill in the lead up to a sale?
Unless the seller (owner with the goodwill) is willing to work out a long handover period, in order to derive a benefit from personal goodwill through a transaction, a buyer needs to demonstrate that any personal goodwill has been passed on to the company.
Some of the key changes you can make to transfer personal goodwill include:
-
Ensure employees have the same client facing contact that you have.
-
Minimise your involvement in the day to day running of the business.
-
Employ a general manager if profits allow.
If the process is handled appropriately in the lead up to a sale, separating yourself from your business can have the added benefit of improving performance and freeing up time.
Staff can often thrive when offered more responsibility and given ownership of their tasks. This can result in more people acting in the best interests of the business. If there are more employees capable of taking on the tasks typically completed by the owner, either client facing or administrative, then it enables the owner to take more time away from the business to take time off or work on growth initiatives.
How can Moore Australia help
Through the discovery phase and planning for sale, the Moore Australia team can help you identify any personal goodwill and how it may effect your potential sale. Contact us today.