Enterprise Goodwill
April 2025
“Goodwill” is defined by the International Valuation Glossary - Business Valuation as “An Intangible Asset which represents any future economic benefit arising from a business or a group of assets which is not individually identified or separately recognized. Goodwill can arise as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified. In the context of a business combination, goodwill is measured as the difference between (A) the aggregate of (i) the value of the consideration transferred (generally at Fair Value), (ii) the amount of any noncontrolling interest, and (iii) in a business combination achieved in stages, the acquisition-date Fair Value of the acquirer’s previously held equity interest in the acquiree, and (B) the net of the acquisition-date amounts of the Identifiable Assets acquired and the liabilities as assumed.”
Courts and valuation experts have recognized that goodwill can be classified as “enterprise” or “personal”.
“Enterprise goodwill is that which exists independently of one’s personal efforts and will outlast one’s involvement with the business.” In re Marriage of Alexander, 857 N.E.2d 766, 769 (Ill. App. 3d 2006). “Enterprise goodwill ‘is based on the intangible, but generally marketable, existence in a business of established relations with employees, customers and suppliers.’” Yoon v. Yoon, 711 N.E.2d 1265, 1268 (Ind. 1999).
On the other hand, “personal goodwill is associated with individuals.” UIC Law Review Volume 26|Issue 1|Article 8 (citing Shannon Pratt’s Valuing Small Businesses and Professional Practices). “It is that part of increased earning capacity that results from the reputation, knowledge and skills of individual people.” Id. “The implied assumption is that if the individual were not there, the clients would go elsewhere.” Business Valuation Resources, LLC, BVR’s Guide to Personal v. Enterprise Goodwill (Adam Manson & David Wood eds., 2011).
Separating personal goodwill from enterprise goodwill is important in many business valuations, especially for both marital dissolution and tax purposes. With respect to marital dissolutions the separation of goodwill is important as many jurisdictions don’t consider personal goodwill to be a marital asset. With respect to taxes, goodwill purchased as part of an acquisition often needs to be separated in order to determine whether or not the sale of goodwill is taxed as operating income or as capital gain.
Unfortunately, there is no easy way to distinguish personal from enterprise goodwill. One must consider the facts and circumstances of each case and assess what percentage of the goodwill is attributable to an individual as opposed to the enterprise. Factors to consider include:
Customer contracts
Reputation of owner
Employment contracts
Non-compete agreements
Age and health of owner
Personal skills of owner
Location and desirability of enterprise location
Phone number of the enterprise
Personal service enterprises tend to have high percentages of personal goodwill, and manufacturing businesses tend to have high percentages of enterprise goodwill. Also, small businesses tend to have high percentages of personal goodwill, as customers go to the enterprise because of the owner, while larger businesses tend to have lower percentages of personal goodwill, as customers go to the business because of the reputation of the enterprise.
To summarize, there is no easy method to separate personal from enterprise goodwill. Numerous factors need to be considered. The bottom line is to ask “What percentage of goodwill is derived from customers that do business with this enterprise because of the owner and what percentage of goodwill is derived from customers that do business with the enterprise because of the enterprise?”
Relevant Court Cases
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TKG Associates, LLC v. MBG Monmouth, LLC et al.,
Indiana Court of Appeals,
No. 24A-PL-1270,
filed April 16, 2025
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Busto v. Arias,
Third District Court of Appeal,
State of Florida,
No. 3D24-0921,
opinion filed March 19, 2025
Recent Business Valuation Articles
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“Artificial Agents and the
Evolution of M&As,”
by Emil Mirzayev, Marco Testoni and
Bart S. Vanneste,
dated January, 2025
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“Real Estate Economy and Valuations,”
by Jawahar Reddy
dated April 1, 2025
Recent Engagements
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interests in a metal processing
facility on a minority interest
basis for planning purposes.
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of the shareholder equity of a
niche sporting goods distributor
on a controlling interest basis
for planning purposes.
- Valuation of a shared-control
interest in the common stock of a
manufacturer/distributor of a
broad range of specialty medical
products for estate tax reporting
purposes.
- Valuation of class B units of
an investment holding company
on a minority interest
basis for gift tax reporting
purposes.
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