Recall from last week’s post that goodwill is the value of your business that is not represented on your balance sheet- the location of your business, great employees, your own professional stature, and the longevity of your company are all included in the goodwill that your company possesses.
Let’s drill down a little beyond the 10,000 ft level, however, and talk about different kinds of goodwill.
For a given company with a certain amount of goodwill (for example, yours), that goodwill can be separated into 2 kinds: personal and professional. For a definition of each:
Personal Goodwill: that goodwill that can be attributed directly to you as the business owner. This can be clearly understood in the example of a highly successful brain surgeon with a private practice.
A significant portion of the reason why patients might give you their patronage is because of the reputation that you have; in other words, if someone else were to take over your business, there is a good chance that there might be a huge exodus of clients and loss of business, because your clients were coming to you because of your individual reputation, as opposed to the reputation of your practice. Your practice would be characterized as one with a high degree of personal goodwill.
Professional Goodwill: that goodwill that exists because of certain aspects of your business, not necessarily attributable directly to you. For example- if you are a partner/owner in a professional practice (eg a law firm), there is a certain amount of goodwill built up over time by the success of your business.
Clients come to you, but not necessarily because you are there; the reputation of the practice alone is enough to get clients to use you in their time of need. There may be some people who use the firm because you are there, but if you were to leave, there might not be much of a negative impact on the business operations of the firm.
This is a typical scenario of a business with high levels of professional goodwill.
This represents the background for a personal vs professional goodwill exercise. If this appears to you to be a semantic exercise not worth going through, I would highly recommend that you stay tuned; next week, I will provide the details for a typical scenario where a goodwill analysis is needed, and you will immediately see the impact of the application of this powerful concept.
Coming next week: A divorcing business owner, and the impact of personal vs. professional goodwill.