What Does Individual Goodwill Mean?
Individual goodwill is the proportion of valuable intangible assets that can be attributed to the persona and personal efforts of an individual. This is mostly relevant for firms operating in a professional services area, but can also apply to any business where an individual is integral to the organization's continued success due to personal relationships or know-how.
Divestopedia Explains Individual Goodwill
In any business, a certain individual possesses exceptional abilities, skills, experiences, contacts and reputation that offer distinct advantages to his or her firm. This attribute is referred to as the individual goodwill of that person. It is not an asset that can be subject to distribution. It is the future earning potential associated with an individual's personal attributes. It is not transferable and does not have commercial value as such.
Potential sources of personal goodwill are:
- Relationship: The personal relationships that an individual has with customers, suppliers and employees. For example, if an attorney leaves a law firm, a key client may leave as well.
- Skill: A person’s expertise, if it is far above that of his or her peers.
- Knowledge: The unique possession of information and the ability to analyze that information, particularly in the area of research and development.
- Reputation of the individual in that industry.
Some personal goodwill may get translated into enterprise goodwill by means of an effective internal control and contractual obligations. If an employment agreement or a covenant not to compete with the firm exists, then the personal goodwill gets transferred to the firm and becomes a corporate asset. If, however, such an agreement is not in place, it is important to document personal goodwill when negotiating the sale of a business. If individual goodwill is not transferred to the firm, a prospective buyer can expect a decline in earnings. Therefore, the amount paid in a transaction for a non-compete agreement represents the personal goodwill of a business owner. To estimate its value, an analyst should consider the price that a qualified buyer would be willing to pay for a firm if the seller is permitted to compete in the same line of business, in the same geographic area.