The concept of personal goodwill was a common topic in several recent auto dealer litigation cases. Not only is the presence (or not) of personal goodwill in a business, no matter the industry, hotly debated, but so is the quantification of that personal goodwill. However, I think the most important question to ask is “does it exist?”  Often with ambiguous concepts like personal goodwill, the adage “you know it when you see it” is the most appropriate answer.

What Is Personal Goodwill?

Personal goodwill is value stemming from an individual’s personal service to a business and is an asset that tends to be owned by the individual, not the business itself.  Personal goodwill is part of the larger bucket of an intangible asset known as goodwill.  The other portion of goodwill, referred to as enterprise or business goodwill, relates to the intangible asset involved and owned by the business itself.[1]

Commercial and family law litigation cases aren’t typically governed by case law resulting from Tax Court matters and can differ by jurisdiction, but Tax Court decisions offer more insight into defining the conditions and questions that should be asked in an evaluation of personal goodwill.  One seminal Tax Court case on Personal Goodwill is Martin Ice Cream vs. Commissioner.[2]  Among the Court’s discussions and questions to review were the following:

Another angle with which to evaluate the presence of personal goodwill, specifically to professional practices, is provided in Lopez v. Lopez.[3]  Lopez suggests several factors that should be considered in the valuation of professional (personal) goodwill as:

Why Is Personal Goodwill Important?

Many states identify and distinguish between personal goodwill and enterprise goodwill.  Further, numerous states do NOT consider personal goodwill of a business to be a marital asset for family law cases.  For example, a business could have a value of $1 million, but a certain portion of the value is attributable and allocated to personal goodwill.  In this example, the value of the business would be reduced for personal goodwill for family law cases and the marital value of the business would be considered at something less than the $1 million value.

How Applicable/Prevalent Is Personal Goodwill in the Auto Dealer Industry?

Readers of this space know that in any writing pertaining to litigation matters, we always try to avoid the absolutes:  always and never.  The concept of personal goodwill is easier identified and more prevalent in service industries such as law practices, accounting firms, and smaller physician practices.  Does that mean it doesn’t apply to more traditional retail and manufacturing industries?  In each case, I think the fundamental question that should be first answered is “Is this an industry or company where personal goodwill could be present?”

For the auto dealer industry, the principal product, outside of the service department, is a tangible product – new and used vehicles.  In order for personal goodwill to be present in this industry, the owner/dealer principal would have to exhibit a unique set of skills that specifically translates to the heightened performance of their business.

Name of Owner/Dealer in the Name of the Business

We are all familiar with regional dealerships possessing the name of the owner/dealer principal in the name of the business.  However, just having the owner’s name as part of the business name does not signify the presence of personal goodwill. An examination of the customer base would be needed to justify personal goodwill.

It would be more difficult to argue that customers are purchasing vehicles from a particular dealership only for the name on the door, rather than the more obvious factors of brands offered, availability of inventory, convenience, etc. An extreme example might be having a recognized celebrity as the name/face of the dealership, but even then, it would be debated how that materially affects sales and success.

“… just having the owner’s name as part of the business name does not signify the presence of personal goodwill.”

Auto dealers attempt to track performance and customer satisfaction through surveys, which could provide an avenue to determine this value (if for example factors that influenced the decision to buy listed Joe Dealer as being their primary motivation) though this is still unlikely and would be subject to debate.

Another consideration of the impact of a dealer’s name on the success/value of the business would be how actively involved is the owner/dealer principal and how directly have they been involved with the customer in the selling process.  Simply put, there should be higher bars to clear than just having the name in the dealership for personal goodwill to be present.

In more obvious examples of personal goodwill in professional practices, the customer usually interacts directly with the owner/professional such as with the attorney or doctor in our previous examples.  How often does the customer of an auto dealership come into contact or deal directly with the owner/dealer principal, or do they generally engage with the Salespeople, Service Manager, or General Manager?

Presence of an Employment Agreement

Another factor that often helps identify the existence of personal goodwill is the presence of an employment agreement and/or non-compete agreement.

The prevailing thought is that an owner of a business without these items would theoretically be able to exit the business and open a similar business and compete directly with the prior business.  Neither of these items typically exist with an owner of an auto dealership.  However, owners of auto dealerships must be approved as dealer principals by the manufacturer.

“Another factor that helps identify the existence of personal goodwill is an employment agreement and/or non-compete agreement.”

The transferability of a dealer principal relationship is not guaranteed, and certainly, an existing dealer principal would not be able to obtain an additional franchise to directly compete with an existing franchise location of the same manufacturer for obvious Area of Responsibility (AOR) constraints.

So, does the fact that most dealer principals don’t have an employment or non-compete agreement signify that personal goodwill must be present?  Not necessarily.  Again it relates back to the central questions of whether an owner/dealer principal is directly involved in the business, has a unique set of skills that contributed to a heightened success of the business, and does that owner/dealer principal have a direct impact on attracting customers to their particular dealership that could not be replicated by another individual.

Conclusions

Personal goodwill in an auto dealership can become a contested item in a litigation case because it can reduce the value consideration. As much as the allocation, quantification, and methodology used to determine the amount of personal goodwill will come into question, several central questions should be examined and answered before simply jumping to the conclusion that personal goodwill exists.

The difference in valuation conclusions between experts in litigation matters generally falls within the examination and support of the assumptions that lead to differences in conclusions. If present, personal goodwill for an auto dealership must exist beyond just having the owner’s name in the title of the business or the existence of an employment agreement.

The existence and determination of personal goodwill can be a complicated topic. For more information or to discuss an issue in confidence, please don’t hesitate to contact me.

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[1] In the Auto Dealer industry, goodwill and other intangible assets are referred to as Blue Sky value.

[2] Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998).

[3] In re Marriage of Lopez, 113 Cal. Rptr. 58 (38 Cal. App. 3d 1044 (1974).