Personal/Professional Goodwill – How It Affects Value Of Small Business
Goodwill Defined. The term “Goodwill Value” is a term of art that is applied to the incremental increase in value of an enterprise over and above the simple replacement value of the fixed assets. Unless it is added to a balance sheet reflecting an actual purchase of goodwill in an acquisition, it almost never is seen on a balance sheet based upon Book Value. It is the primary reason for business appraisals. It is a necessary element to determine the actual Fair Market Value of a business enterprise.
Goodwill Has Two Basic Potential Components.
• The basic form of Goodwill is “Enterprise Goodwill.” It applies to the business as a whole and exists irrespective of the increment of value resulting from a key person’s personal knowledge, reputation, customer relationships, or any other attribute which resides in his persona. It generally reflects a value which would exist without the participation or contributions of one or more key officers or employees.
• Personal and Professional Goodwill are very similar and they attach to the individual that contributes them. Personal goodwill is associated with individuals. It is the part of increased earning capacity that results from the reputation, knowledge and skills of individual people, and is non transferable and unmarketable. An example would be the CEO of a small business that has long-term personal relationships with the customer base, which could (or likely would) be lost if the person no longer were to be involved in the business.
Similar to personal goodwill, professional goodwill is often characterized as ‘conceptually distinct from that associated with a trade or business’ and attached to the individual. It is usually associated with reputation and experience. In most professional practices, professional goodwill is largely dependent upon the skills and attributes of the individual practitioners.
Reasons for Valuing Personal/Professional Goodwill. There are really basically two purposes: marital dissolutions and sales of businesses.
Marital Dissolutions. The most common reason for an actual appraisal of personal/professional goodwill value is marital dissolutions. This is because it varies widely from state to state as determined by case law. The two issues are whether Enterprise Goodwill and/or Personal/Professional Goodwill are included in the marital estate. Our research shows the following:
• In 6 states neither personal/professional or enterprise goodwill is included in the marital estate.
• In 4 states the issues are undecided.
• In 40 states enterprise goodwill is included, but in 24 of these, personal/professional goodwill is not.
Sales of Businesses. Normally, a business appraisal obtained by a seller will not break down personal goodwill as separate from enterprise goodwill unless the entity is a C-Corporation. This is because normally any personal goodwill is mitigated in the purchase and sale agreement to provide a means whereby the buyer will “inherit” the personal goodwill of the seller. This is done with such tools as:
• Non-Competition Agreements
• Retaining the seller as a key employee for a defined period of time
• Partial buy in, with a buy out later.
The objective of any of the above tools is to create time and exposure to the buyer by the client or customer base to allow them to become inured to the purchaser.
The principal reason a seller will want to know what percentage of the total Goodwill Value is personal/professional is that these can often be mitigated prior to the sale by effectively transferring the personal/professional goodwill to key employees. This typically results in the buyer being willing to pay a higher price for the business.
If personal/professional goodwill is mitigated it also opens the field to investor-buyers as opposed to operator-buyers. For more valuable businesses, the investor-buyer is likely the most efficacious way to sell.
Splitting the Sale in the case of a C-corporation. The biggest problem for owners of C-corporations is the double taxation of capital gains upon a sale. First it is taxable to the corporation, then when distributed to the shareholders it is taxed again at the personal tax level. This is not the case with proprietorships, partnerships, LLCs or S-Corps.
However, where personal goodwill is part of the sale, it can be structured as two separate transactions. One is a sale of the C-corporation’s interest (either stock sale or asset sale) and the other is a personal sale of personal/professional goodwill, which will then be taxed only at the personal rate.
Post by: Gerald W. Barney MS, CSBA, CMEA
American ValueMetrics Corp.
www. Americanvaluemetrics.com
info@americanvaluemetrics.com
Media Training Basics
A primary goal of any media interview is to inject your agenda into the news story. The best way to do that is to express yourself in “gotta use that” language, phrases so compelling the reporter thinks to herself, “I couldn’t say that better myself.” Here are some “dos” and “don’ts” for creating compelling answers.
Do:
Answer in Complete Sentences.
Include the Sense of the Question in Your Answer.
Brand
Be Specific
Don’t:
Repeat Negatives in a Question
Introduce Negatives
Use Toxic Words
The Dos:
Answer in Complete Sentences. You learned this one back in grammar school; the teachers always admonished you to answer question in complete sentences. Why? Well, for one thing, it makes your answer self-contained. If you deliver a sentence fragment in response to a question, the journalist is unlikely to use the answer.
Include the Sense of the Question in Your answer.
“How’s the weather today?”
“It’s cloudy and cold.”
If you find yourself beginning to answer a reporter’s question with “it’s” or “because,” you are having a conversation, not doing an interview. “It’s cloudy and cold” is a conversational answer. Because complete sentence answers incorporating the sense of the question are easier to use journalist are more likely to use them.
Brand. Ever hear someone on radio refer to “the book,” “my book” and “it.” Well, go to amazon.com or Barnes & Noble and try to buy “the book,” “my book” or a book called “it.” Can’t be done. My motto: “If it’s got a name, use it.” “We?” Banish it. Use the company or organization name. “It?” Banish it. Tell us what it is.
Be Specific. The media love specifics. “A lot of money” can mean hundreds of dollars to some people, thousands to others and millions to still others. If you use the actual, specific number, you’ll be more likely to be quoted and understood.
Now let’s examine the Don’ts:
Never Repeat Negatives in a Question. I know, I just told you to incorporate the sense of a question in your answer. This is the exception to that rule. Avoid repeating negative words, even when you’re refuting them:
Q: Isn’t this just a disaster waiting to happen?
A: No, it’s not a disaster waiting to happen….
The reporter can drop the question, use your answer and it looks like you are haunted by the possibility that this is a disaster waiting to happen.
Don’t Introduce Negatives. During a Watergate-era news conference President Richard Nixon said, “I am not a crook.” No one had asked him if we was a crook. He brought up the negative on his own; a media misstep of historic proportions..
Avoid Toxic Words. Often we use a toxic word when more benign words with less baggage will do. Bailout vs. rescue. One is negative, the other hopeful. Cost vs. investment. One implies a return, the other does not. In the abortion debate, both sides avoid the negative prefix “anti-.” Abortion opponents don’t call themselves anti-abortion, but pro-life. Abortion rights supporters call themselves pro-choice.
In interviews, we sometimes use everyday words that contain hint of toxicity. The word “stuff” diminishes whatever it is your are characterizing even if you precede it with the word “good.” “As a result of research done for the space program, society has gotten a lot of really good stuff.” (Remember the mandate to be specific. Instead of good stuff, tell us what it is, without using “stuff.”)
I suggest banning from all your media interviews the words “try,” “ trying,” “ hope” and “hopefully.” They are weak words. “We’re trying to create a new power source.” No. “We’re plan to create a new power source.” is far stronger. “We hope we can reach our goals.” No. “We intend to reach our goals.” “Hopefully, we will reach our goals.” Hopefully? It’s the weakest word in the English language. The only purpose it serves in a sentence is to diminish all the other words.
But, wait, you say, didn’t the nation elect a president who ran on a campaign of hope? Yes, but it was hope as a noun, not as a verb. His book was not “The Audacity of Hoping,” it was “The Audacity of Hope.” His campaign motto was not, “Yes We’re Trying,” but “Yes We Can.” Small changes in the choice of words yielded much more powerful slogans.
Book Review: Mass Affluence
Filed Under: Books of Interest
Tags: Book review, Marketing
I understand that these are tough economic times in general; that Americans are cutting back on spending and buying less expensive versions of consumables and staples. In general, we are forgoing the $5 toothpaste for the $3 stuff, and opting out of the GPS, sunroof and mud-flap package on our new cars. It’s quite a contrast from just five years ago when Paul Nunes and Brian Johnson wrote Mass Affluence: 7 New Rules of Marketing to Today’s Consumer. The $5 toothpaste that we all used, it was gateway product to get us all to go for $40 tooth-whitening stuff; the GPS that we had to have might have been only worth $300 to us, but to get it, we had to spend $1100 for a whole package. We got rid of our brooms and mops and replaced them with Swiffers. And when was the last time you saw a single-bladed safety razor? We may be trying to cut back on our cost of living, but in many cases, the products that fit an economical lifestyle have disappeared, like the $2 single-bladed razor, and our only option now is the $12 five-bladed razor and its $8 refills. And do they even make printed street maps anymore? Can we get by without built-in GPS? So how did this happen?
Nunes’ and Johnson’s research gives a clue: in one of their surveys they found that the majority of people would be willing to spend more for their purchases if they could find ones that better fit their needs. In fact 68% of people earning less than $50,000 made this claim and this rose to 87% for people making over $150,000. The point, according to the authors, is that companies were failing to innovate and thus were leaving money on the table. Some companies, like Proctor & Gamble and Gillette, found ways to get pick up some of that money with their teeth whiteners and five-bladed razors: they gave us stuff that we wanted and were willing to spend money on. The next question though, is whether or not these marketing practices will hold true in the post-9/2008 economy. My feeling is that they will.
Nunes’ and Johnson’s rules simply put in writing a few things that we have been experiencing for the past decade. We’ve gotten accustomed to the up-sell and the conveniences that come with it, whether that is the GPS or the disposable mop. Convenience, and the time savings that come with it, plus a certain essence of luxury in our consumables and services will continue to be attractive attributes. Beyond that, though are the other new rules: Nunes and Johnson recommend that companies market goods and services that are positioned to get more people to spend more not only consumables but lifestyle products. An example of this is the introduction of the $500 upgrade to first-class on a flight and paying 10 times the price for a lift ticket at some ski resorts just to be among the first in line for the fresh snow. Companies should also offer occasional use items and alternate use items. An example for these would include offering an urban bicycle, a mountain bike, and a road bike each so distinctive for their use that one wouldn’t mix uses. Another offering is to make your customers feel like investors in your company: these may be in the form of annual ‘dividends’ based on the amount of their purchases or some other reward points program.
There is another rule or two and a look into the future. Unfortunately it’s a future very different what are actually experiencing. Nevertheless, much of what Mass Affluence has to offer is a lot of good ideas that provide a base for what could be your next great idea.
101 on Venture Capital
Filed Under: 101, Capital
Tags: Capital, Entrepreneur, Venture Capital
Venture capital investors play an integral role in the development of start-up companies by providing needed funds to high-risk, early-stage companies with strong growth potential. Venture capital investors provide entrepreneurs with initial seed money and additional financing at various stages of the often fast-paced growth process, with the ultimate goal of either taking the company public in an initial public offering (an “IPO”) or selling the company to, or merging it with, a larger, an established industry player.
Current economic conditions, however, have brought venture capital investments to the lowest level in years. The small, high-growth firms which benefit most from venture capital are particularly susceptible to downturns in the broader market, making what are already perceived as high-risk investments in such companies even riskier. As a result, new venture capital fundraising is down significantly to just a fraction of funds raised in previous years.
In addition, the two traditional means of achieving returns on venture capital investments (an IPO or a sale to a larger company) are largely unavailable. The IPO market has come to a near standstill, although some are forecasting marginally increased activity later in 2009. The market for mergers and acquisitions has similarly declined. As a result, venture capital investors are unable to exit their current investments, and, if an exit is possible, it will likely represent a substantial or total loss, further chilling the market for new venture capital investments.
A new group of secondary investors is emerging to pick at the carcass of current venture capital investments. These investors purchase the interests of current venture capital investors at a substantial discount, hoping for later gains when the IPO and mergers and acquisitions markets thaw. This secondary market at least provides some liquidity to those currently stuck in venture capital positions.
Despite this dour news, there is some reason for optimism. There is evidence that corporate acquirers are taking tentative steps to reenter the market for start-up operations, albeit on conservative terms. Some larger companies are using these difficult times to make strategic purchases of start-up companies, as evidenced by Google’s recent creation of a $100 million venture capital fund. Click on the link below for information about the Google venture capital fund http://blog.delawareinc.com/2009/04/google-launches-a-venture-capital-fund/. In addition, well-positioned emerging companies are increasingly taking advantage of the distressed balance sheets of public companies, acquiring technologies and operations from these companies at a relatively depressed price. This practice was virtually unheard of before the current downturn.
In short, while the current state of financing for start-up companies is glum, the market for innovation and high-growth companies will return. The entrepreneurial spirit has and always will survive difficult markets, and investment assets invariably seek out the brilliant new cutting-edge companies and innovations that will shape the future.
Negotiating 101: The Pitfall of Being Too Eager to Reach an Agreement
Filed Under: 101, Books of Interest
Tags: Books, Negotiating
Recently, a friend and business-owner casually asked my advice about negotiating. Currently, she is in the midst of thinking through a strategy related to the sale of a piece of real estate. As we were talking, the question came up: Is establishing the lowest acceptable price an effective approach?
In the well-known negotiating classic, Getting to Yes, authors Roger Fischer and William Ury do a terrific job of articulating the exact goal of all negotiation techniques and strategy. Good negotiating skills, they write, can protect you from making an agreement you should reject and help you make the most of your assets so that any agreement you reach will satisfy your interests.
According to these authors, the most significant tool for accomplishing these two objectives is not in fact, establishing a bottom line or worst acceptable outcome, but rather; establishing your best alternative to a negotiated agreement.
They claim that while establishing your worst acceptable outcome may help you avoid agreeing to something you shouldn’t, it may also keep you from inventing and agreeing to a solution it would be wise to accept. Why? Because a bottom line limits your ability to benefit from what you learn during the negotiation, inhibits your ability to invent an imaginative solution, and is likely to be set too high.
In any case, in most circumstances, the real danger is that you are too committed to reaching an agreement. Fischer and Ury clarify that your best alternative to a negotiated agreement is the standard against which any proposed agreement should be measured. Most people think that they will try to reach an agreement and only then, will they research and develop alternatives. However, this tried and true classic states that having a good alternative not only enables you to determine what is a minimally acceptable agreement, it will probably raise that minimum. And the more easily and happily you can walk away from a negotiation, the greater your capacity to affect its outcome.
Let us know your best negotiating tactics in the comments!
