Personal Goodwill and Why It Matters

For many businesses, the value of intangible assets dwarfs the value of their tangible assets. Ocean Tomo, an intellectual property consulting firm, released their 2010 annual study of intangible asset market value, which concluded that the implied intangible asset value of the S&P 500 reached 80% of total market capitalization, which was down slightly from the previous year.(a) Intangible assets represent the excess market value of a business beyond the value of its tangible assets.

Goodwill is an intangible asset that cannot be traced to an identifiable source, such as patents or trademarks. Firms that provide professional services frequently have two categories of goodwill; personal goodwill and enterprise goodwill. Personal goodwill attaches to a particular individual rather than to the operating business. Enterprise goodwill results from characteristics of a particular business, for example a high-traffic location.

Family law courts in many states operate under the principal that personal goodwill is not a marital asset subject to distribution, but represents future earnings potential associated with an individual’s personal characteristics. Hence, the component of personal goodwill may need to be identified and segregated from any enterprise goodwill.

Personal goodwill generally can be traced to two main sources:

1. Contacts and Relationships:

The landmark 1998 Tax Court case of Martin Ice Cream v. Commissioner noted the existence of personal goodwill due to the ice cream distributor’s relationships with customers. (b) Customers continued patronage due to an individual’s personal relationships are a primary source of personal goodwill. Relationships with suppliers and employees can also contribute to personal goodwill, providing a loyal, motivated workforce and a reliable source of inventory at or below market price.

2. Skill, Knowledge, and Reputation:

Skill may be in the form of either intellectual, physical, or both. Surgeons are an example who may have both qualities, gaining customer referrals and patronage due to innovative techniques (intellectual) as well as manual dexterity (physical). A practitioner’s skill level is often the source of the related reputation. For a firm that produces highly technical products or services, an individual’s knowledge and education may be unique to the industry, providing a superior competitive edge.

Segregating the intangible value of a business between personal and enterprise goodwill is challenging and there is no single method that will fit all situations. The quantification of personal goodwill is dependent upon the facts of each case and is often approached by estimating the financial impact the departing employee or owner will have on the business.

Personal and enterprise goodwill are elements of value that are relevant in divorce, tax, bankruptcy and other settings. Segregating the values into their separate components is difficult and a subjective task. Courts and valuation experts have yet to agree on a consistent method of bifurcating goodwill. By using evidence from the existing facts and circumstances, the valuation analysts can estimate the degree of personal and enterprise goodwill to help ensure equitable outcomes in marital dissolution cases.


(a) “Ocean Tomo Announces Results of Annual Intangible Asset Market Value Study”, http://www.oceantomo.com/media/publications. April 4, 2011.

(b) Martin Ice Cream Company v. Commissioner of Internal Revenue, 110 TC 189 (1998).