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Consider personal goodwill in dealership acquisitions

April 14, 2009
Filed under Legal Experts

Jim KrendlIn many non-motorsports businesses we find the sale of an operating business often involves selling what is called “personal goodwill.” This is a fairly new idea that doesn’t seem to have taken hold in the motorcycle world yet. Personal goodwill is an intangible asset that may involve the reputation, contacts, knowledge and skills of an individual. Think of a motorcycle dealership called John Brown’s Motorsports Center where John handles a variety of new and used products, and where he has established a reputation over many years of being knowledgeable, reliable and easy to work with.

Suppose further that John’s dealership is incorporated, and a prospective purchaser wants to buy the stock of John’s corporation. For many reasons, including tax treatment of the consideration for the sale, both the buyer and the seller may find it useful to negotiate a purchase price for the corporate stock and a separate purchase price for John’s personal goodwill.

The existence and sale of personal goodwill in such a situation has various potential benefits. For example, the buyer can amortize the payments for goodwill to create future tax deductions. He ordinarily could not deduct the same payments if they were attributable to his purchase of corporate stock.

Of course, the parties must be able to prove, especially for tax purposes, the value of the personal goodwill and the seller’s ability to transfer this value to a buyer. But in a suitable situation, the idea may expedite a sale.

Disclaimer: This blog is a highly simplified general discussion. It is not legal advice. Such advice should come solely from qualified legal counsel who understands your situation and who is familiar with all relevant facts, variations in state and local laws that may apply to you, and other matters beyond the scope of this blog.

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