Goodwill - Can it be transferred?

Goodwill is an intangible but saleable asset, just like reputation or location of a business, it is an asset that engenders the expectation of continued customer or client patronage if the business is sold to a potential buyer. It represents a competitive advantage and typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations, high employee morale, service quality and any patents or proprietary technology. In simple terms goodwill is any advantage that enables a business to earn better profits than its competitors. It does not refer to the tangible assets of the business.

A business venture over time endears itself to its customers either by the quality of its products and or service or by the product or service delivery experience. For this reason the customers (now converts or believers) return to patronize the enterprise over and over again and even become its ambassador and advocate, recommending its product or services others . When given a choice of product or service provider, converts choose a particular business they have come to know, like and trust over the competition; thus goodwill has been created.

In recognition of the concept of goodwill and its ability to translate into increased earnings, different valuation models have been developed to account for it, just as any other asset would be accounted for on the books of the company.

The valuation of goodwill poses a challenge because goodwill is an intangible asset derived from other assets of the business. Its existence depends upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of.

We shall not go into the technical details of goodwill valuation and recognition as per accounting rules. Suffice it to say here that in accounting, goodwill is the excess of the amount paid over the Net Asset Value of an acquired business. (Net Asset is the total value of a company's assets less the total value of its liabilities.) It is shown in the balance sheet of the acquiring company.

The pertinent question then is: can goodwill be transferred? In answering this question it is important that we divide goodwill into its component parts -business and personal goodwill.

Business or commercial goodwill or practice goodwill for service companies, relates to a company's ability to generate earnings based on its assets and operational procedures (like brand recognition, systems, staff, operating procedures, client base, market share, location and so forth). On the other hand, personal or professional goodwill is directly associated with the owner or a certain individual in the organization. It derives from their reputation, skills, abilities, contacts, personal and or professional success, respect and trust.

Obviously in regard to sale of business and a change of ownership, business goodwill is more easily transferred and therefore of more worth than personal goodwill. Personal goodwill may in some rare cases be transferred through client introductions and so on, but in most instances it resides with the individual and technically cannot be transferred.

A good example comes to mind. A thriving medical practice had the majority of its clientele predominantly from a certain demographic, to which the retiring owner belonged. It was purchased by a new owner who worked with the previous owner for a long period. The firm quickly lost many of its clients. The new owner conducted a third party survey to investigate why clients chose to leave. None of them chose 'professional incompetence' or 'not happy with the service' as their reason to leave. So it was down to the personal relationship they had with the previous owner.

Because business goodwill is intrinsic to the organization itself, it is easily transferable. Personal goodwill on the other hand really belongs to an individual and not the organization, technically it is not transferable. I guess this is true of the age long saying 'you cannot give (transfer) what you do not have.'

Sources
http://www.michaelgoldman.com/professional_practices.htm

http://www.dolmanbateman.com.au/835/business-goodwill/
personal and commercial goodwill.
http://www.smbtn.com/smallbusinessdictionary/
http://www.answers.com/topic/goodwill