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The Power of Personal Goodwill: A Guide for Founders

  • Writer: Langston Tolbert
    Langston Tolbert
  • Jan 5
  • 3 min read

Why Personal Goodwill Matters

Did you know your personal reputation and relationships could save you thousands—or even millions—in taxes when you sell your business? This is the power of personal goodwill.


Personal goodwill is a unique and often overlooked asset for founder-led businesses, especially during an exit. Unlike corporate goodwill, which belongs to the company, personal goodwill is tied directly to the founder’s reputation, expertise, and relationships. When recognized and allocated correctly, it can:


  • Save on Taxes: Proceeds allocated to personal goodwill are taxed as capital gains (typically 20%) rather than ordinary income (up to 37%).


  • Reflect Your True Value: Capturing personal goodwill in a sale acknowledges the irreplaceable role you play in driving your company’s success.


One landmark case, Martin Ice Cream Co. v. Commissioner (1998), shaped the legal foundation for this concept. The court ruled that personal goodwill belongs to the individual if it is tied to identifiable intangibles such as customer relationships, vendor connections, and personal expertise. This precedent underscores the importance of understanding and leveraging personal goodwill during an exit.



Key Tax Advantages

For founders of C corporations, personal goodwill offers a way to avoid double taxation. Typically, C corporation proceeds are taxed twice—once at the corporate level and again as dividends to shareholders. Allocating proceeds to personal goodwill can sidestep this, enabling founders to realize tax savings while allowing buyers to amortize the goodwill over 15 years.


Tax Comparison Chart:

Scenario

Tax Rate

Explanation

Ordinary Income

Up to 37%

Double taxation for C corporations.

Capital Gains (Goodwill)

20%

Single tax on personal goodwill allocations.



Case Study: The Martin Ice Cream Co.

In this pivotal tax court case, the founder’s personal relationships with vendors and customers were deemed distinct from the corporate entity. This decision established a framework for identifying personal goodwill as an asset separate from corporate goodwill, even in nonprofessional businesses.


Applying the Case to Your Business


  • Ensure your key relationships and expertise are well-documented.


  • Avoid employment agreements that assign goodwill to the corporation.


  • Clearly separate personal and corporate goodwill in sale agreements.



5 Ways to Build and Leverage Personal Goodwill

  1. Cultivate Relationships:


    • Strengthen key client and vendor connections. The stronger these relationships, the more valuable your personal goodwill becomes.


    • Example: Host exclusive client appreciation events to deepen relationships.


  2. Establish Your Expertise:


    • Build a personal brand through thought leadership, such as writing, speaking, or media appearances.


    • Example: Publish LinkedIn articles or appear on industry podcasts.


  3. Document Your Value:


    • Keep records of how your personal contributions directly drive revenue and client retention.


    • Example: Track key client acquisitions or major deals initiated by you.


  4. Negotiate Strategically:


    • Avoid signing employment or non-compete agreements that assign all your contributions to the company.


    • Example: Consult an attorney to structure agreements that protect your personal goodwill.


  5. Protect Intellectual Property:


    • Register trademarks and other IP tied to your personal brand to strengthen your claim to personal goodwill.


    • Example: Trademark your personal brand or proprietary methods.



Challenges and Solutions


Proving Personal Goodwill


  • Challenge: The Martin Ice Cream Co. v. Commissioner case highlighted the importance of clear documentation and credible valuations. The court rejected an arbitrary allocation of goodwill because it lacked supporting evidence.


  • Solution: Invest in a professional valuation. Clearly separate personal goodwill from corporate goodwill in agreements and provide tangible evidence of your contributions.


Common Missteps


  • Challenge: Blurring personal and corporate goodwill in a single agreement can invite IRS scrutiny.


  • Solution: Use a dedicated personal goodwill agreement alongside the asset purchase agreement.


Corporate Structures and Tax Planning


  • Opportunity: C corporations, especially those with significant intangibles tied to founders, stand to benefit the most from personal goodwill allocations. However, even S corporations and partnerships can leverage personal goodwill to reduce tax liabilities in certain situations.


Practical Steps for Founders


  1. Work with Experts: Collaborate with attorneys and CPAs who specialize in M&A and tax planning.


  2. Valuate Early: Determine the value of your personal goodwill well before a sale to strengthen your negotiation position.


  3. Plan Your Exit: Structure transactions to maximize the benefits of personal goodwill while aligning with your long-term goals.


  4. Document Everything: Maintain records of client relationships, contracts, and your personal contributions to the business.



Take Action

Your exit is your legacy—don’t leave money on the table. Recognizing and leveraging personal goodwill can make a significant difference in your exit valuation and tax burden.



Schedule a consultation with our team today to ensure you maximize your personal goodwill and achieve a successful exit.

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