Selling Your Personal Goodwill

Owners of certain businesses might hear the phrase “personal goodwill” during the sale of their business, usually from a CPA or M&A lawyer. When used properly, selling personal goodwill can be a powerful planning tool for a seller.

This post explains what personal goodwill is, which types of business owners may be able to separate personal goodwill from enterprise goodwill, how a portion of the purchase price can be allocated to personal goodwill, and the pros and cons of doing so from the seller’s perspective.

What Is Personal Goodwill?

Goodwill generally refers to the intangible value of a business that goes beyond its tangible assets. In many small businesses, especially personal services businesses, goodwill can exist in two forms:

• Enterprise goodwill, which belongs to the business entity and is transferable with the sale of the business.

• Personal goodwill, which belongs to the individual owner and arises from that owner’s personal relationships, reputation, skills, and know-how.

Personal goodwill exists when customers, referral sources, or other key relationships are tied primarily to the individual owner rather than to the company itself.

Which Business Owners May Qualify for Personal Goodwill Treatment?

Not every business owner can separate personal goodwill from enterprise goodwill.

Personal goodwill is most likely to exist when the value of the business is closely tied to the owner as an individual rather than to the business entity, brand, or systems.

Owners who are more likely to qualify include:

• Professional Services Providers. Professionals such as consultants, accountants, architects, engineers, physicians, dentists, therapists, and attorneys often develop strong personal relationships with clients and referral sources. In many of these businesses, clients choose the professional first and the firm second.

• Relationship-Driven Service Businesses. Owners of marketing agencies, PR firms, executive recruiting firms, financial advisory practices, and similar businesses may qualify when client relationships are driven by the owner’s personal credibility, reputation, or network.

• Founder-Led Businesses With Limited Brand Independence. Founders who are the public face of the business and who personally generate or retain a significant portion of the company’s revenue may have personal goodwill, particularly if clients associate the value of the services with the founder rather than the company name.

• Owners Without Restrictive Employment or Non-Compete Agreements. Personal goodwill is more likely to exist when the owner has not previously transferred their personal relationships to the business through employment agreements, non-competition agreements, or similar contracts. If the business already “owns” those relationships contractually, personal goodwill may no longer exist as a separate asset.

• Businesses With Ongoing Owner Involvement Post-Closing. If the buyer requires the seller to stay involved after closing to retain customers or referral sources, that is often a signal that some of the value resides with the individual owner rather than the entity.

By contrast, owners of businesses with strong brands, institutional customer relationships, diversified sales teams, and well-developed systems are less likely to have meaningful personal goodwill that can be separated from enterprise goodwill.

When Personal Goodwill Is Most Relevant in a Sale

Personal goodwill typically becomes a focus when:

• The business is heavily owner-dependent.

• Customers or referral sources follow the owner, not the brand.

• The buyer views the owner’s continued involvement as essential.

• The transaction is structured as an asset sale.

• Tax efficiency is a meaningful planning objective for the seller.

In these situations, a portion of what the buyer is paying for may not be owned by the business entity at all. It may be owned personally by the seller.

How a Purchase Price Can Be Allocated to Personal Goodwill

Allocating value to personal goodwill generally involves several coordinated steps:

1. Identifying Personal Goodwill. The seller’s deal team evaluates whether personal goodwill exists based on the business’s operations, customer relationships, and legal history.

2. Determining a Supportable Allocation. A portion of the total purchase price is allocated to personal goodwill. This allocation should be reasonable and defensible based on the facts of the business.

3. Tailoring Agreements. Because personal goodwill belongs to the individual, it is typically transferred through a separate personal goodwill agreement between the buyer and the owner, in addition to the asset purchase agreement for the other business assets. Your tax advisor and lawyer should work together to determine how to best document the transaction under the circumstances surrounding your particular deal.

4. Maintaining Consistent Tax Reporting. Both buyer and seller must report the allocation consistently on their tax returns.

Careful documentation and alignment among advisors are critical to reducing risk.

Pros of Getting Paid for Personal Goodwill

From the seller’s perspective, the most common advantages include:

• Potential Tax Benefits. Amounts allocated to personal goodwill are generally treated as capital gain to the individual seller, which may result in a lower overall tax burden.

• Avoidance of Entity-Level Tax. In certain structures, particularly C corporation sales, personal goodwill allocations may allow a portion of the purchase price to bypass entity-level taxation.

• Accurate Reflection of Economic Reality. For owner-centric businesses, a personal goodwill allocation recognizes that the buyer is paying for access to the owner’s relationships, reputation, and expertise.

• Deal Flexibility. Personal goodwill can sometimes help bridge valuation gaps or improve after-tax outcomes without changing the headline purchase price.

Cons and Risks for the Seller

Personal goodwill also comes with trade-offs that sellers should understand:

• Higher Scrutiny and Complexity. Personal goodwill requires careful legal and tax analysis. Poor documentation increases audit and dispute risk.

• Stronger Restrictive Covenants. Buyers often demand robust non-compete and non-solicitation obligations when paying for personal goodwill.

• Buyer or Lender Pushback. Some buyers, lenders, or SBA loan programs may be skeptical of personal goodwill allocations, which can complicate financing or delay closing.

• Not Always Available. If the owner has already assigned goodwill to the business through prior agreements, personal goodwill may no longer exist.

Personal Goodwill Is a Planning Tool

Getting paid for personal goodwill is not automatic, and it is not appropriate in every sale. It works best when the facts clearly support it, the allocation is reasonable, and the seller’s legal and tax advisors are aligned early in the process.

For owners of personal services businesses, the key question is not whether personal goodwill sounds attractive. The real question is whether personal goodwill truly exists in your business and, if it does, how it should be addressed in the transaction structure.

Business owners should consult with their tax and legal advisors early in the deal process to determine if and how personal goodwill should be addressed. Even after the advisors determine that allocating part of the purchase price to personal goodwill may be available in the transaction, the seller will still need the buyer's agreement to structure the transaction that way, which may require educating the buyer.

About the Author

Joel Ankney is The Sell-Side Lawyer. He leverages more than 30 years of experience to help business owners across the United States navigate the process of selling their businesses, extract the wealth they have created, and move confidently into the next stage of their lives.

Joel represents sellers. His practice focuses on small- and lower-middle-market business sales, with an emphasis on protecting what matters most to the owner.

Joel enjoys talking about business deals. If you are considering selling your business and would like to explore your options, please contact him at joel@sellsidelawyer.com.

Disclaimer: This blog post is provided for general informational and educational purposes only. It is not intended to be, and should not be construed as, legal advice. Reading this post does not create an attorney-client relationship between you and the author. This blog post may be considered attorney advertising under the Virginia Rules of Professional Conduct. Prior results do not guarantee a similar outcome.