November 10, 2014

Goodwill Hunting: Distinguishing Personal Goodwill from Enterprise Goodwill

In the last issue of Colleagues, we defined Goodwill, and specifically Goodwill in a Professional Practice. In this issue, we will look at the importance of distinguishing between personal goodwill and enterprise goodwill.

Personal goodwill is associated with the skill, experience and relationships of a proprietor or key staff that is generally not transferrable to another party. Enterprise goodwill on the other hand relates to factors such as location, market position, corporate reputation, longevity of the business, etc.

One of the significant attributes that assists in distinguishing the nature of the goodwill is the type of customer that the business attracts. In Whitman Smith Motor Company v. Chapman , types of customers to a business were zoologically classified into cats, dogs, rats and rabbits.

  • The cat prefers the old home to the person who keeps it, and stays in the old home although the person who has kept the home leaves.
  • The faithful dog is attached to the person rather than to the place, and will follow the outgoing owner if he does not go too far.
  • The rat has no attachments and is purely casual.
  • The rabbit is attracted to mere propinquity. He comes because he happens to live close by and it would be more trouble to go elsewhere.

It is not a matter of Goodwill being either completely personal or enterprise but can be a combination of both:

  • It’s personal. The Neurosurgeon attracts clientele as a result of people seeking out his skills as and when they are required. It is not generally expected that there will be a repeat patronage as once the service has been performed the need to seek the neurosurgeon is complete. Once the neurosurgeon stops performing these services he no longer is able to generate income.
  • It’s not personal. Driza-Bone has been operating in excess of 100 years providing similar styled products over that period. It is the nature of the product and its reputation that attracts continued patronage.
  • It’s got some personality. The accountant who prepares annual tax returns for his client has the opportunity to provide services on an ongoing basis as a result of the type of service he provides. If the individual were to leave the firm the client may simply stay with the firm and determine their level of satisfaction on completion of the service or alternatively seek out the person because they have a particular affinity with the individual who provided the service previously.

Invariably each case’s circumstances determine the nature of Goodwill, and care needs to be taken to ensure that the value of Goodwill accurately reflects the future capacity of the business to generate profit over and above the amount necessary to remunerate the proprietor for his/her efforts and a return on the capital employed.

For more information on Personal and Enterprise Goodwill, contact one of our Forensic experts here.

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