Whether to Establish an ESOP Not all companies are fit for an ESOP. The decision to create an ESOP is a significant one, and it requires careful evaluation beyond enthusiasm or the appeal of tax deferral. Two critical considerations stand out when evaluating whether to move forward: (1) independence of the valuation expert, and (2) whether the company is operationally, financially, and structurally suited for ESOP ownership. The author discusses the consequences of sponsoring an ESOP. For many closely held business owners, the question of succession planning often leads to consideration of an Employee Stock Ownership Plan (ESOP). ESOPs offer…
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In the Analysis of Personal Goodwill In the sale of a C corporation in an asset deal, the sellers may argue that a portion of the purchase price is for personal goodwill so that the proceeds are not subject to double taxation. In the context of divorce, personal goodwill may not be a divisible asset, while enterprise goodwill is. This article discusses the quantification of personal and enterprise goodwill using the multi-attribute utility model (MUM). A key consideration in both the sale of closely held C corporations and valuations for marital dissolution purposes involves the existence and value of personal…
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Identification First! Few articles in the business valuation profession address the identification component of valuing goodwill, particularly personal or professional goodwill in the context of matrimonial dissolution matters. Current literature provides valuation professionals with techniques regarding the quantification or valuation exercise (e.g., cost approach, discounted cash flow, relief from royalty, etc.); however, this leaves professionals in some cases quantifying goodwill without determining what, if any, personal goodwill characteristics exist. This potential misstep may leave a valuation professional not addressing or identifying evidence to support that such an intangible asset exists. This article focuses on suggested practices to identify personal goodwill…
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Why it Matters Distinguishing between enterprise (or business) goodwill and personal (or professional) goodwill can sometimes be difficult. That distinction is often necessary in marital dissolution and shareholder dispute cases, and when a business is sold. For valuation purposes, the classification is important because prospective buyers will only pay for goodwill that is transferable. In addition, there are tax implications associated with the classification. This article provides an overview of the importance of understanding how to classify goodwill and issues that arise in litigation. When is it Necessary? Distinguishing between enterprise (or business) goodwill and personal (or professional) goodwill can…
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To a Key Employee—Part II of II In this second part, the author provides readers an illustration of the decision-making and allocation issues. These include issuing options, phantom stock, and converting the existing entity. Read Part I here.
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To a Key Employee—Part I of II The author encourages, as a starting point, owners of a closely held company to consider numerous issues with regard to the compensation of key employees. If the closely held company operations are successful, valuable and long-term employees sometimes seek to be compensated through an equity ownership in the company. This key employee desire for equity ownership has practical implications as well as taxation implications. From the practical perspective, the founding owners assumed the business risks and financial risks of starting the closely held company. Accordingly, the founding owners understandably feel that they are…
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The Value of a Business is Not Always What it Seems (Part II of II) Personal goodwill is taxed at the individual capital gains tax rate, not the higher corporate income tax rate. Therefore, a credible personal goodwill calculation can amount to significant tax savings. One that is not adequately defensible invites risk of an audit. Every personal goodwill calculation is unique to each business, and the management interview is crucial. In this second part of the article, the author discusses issues that arise valuing identifiable intangible assets if goodwill is derived by first valuing personal goodwill, questions to ask…
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The Value of a Business is Not Always What it Seems (Part I of II) Personal goodwill is taxed at the individual capital gains tax rate, not the higher corporate income tax rate. Therefore, a credible personal goodwill calculation can amount to significant tax savings. One that is not adequately defensible invites risk of an audit. Every personal goodwill calculation is unique to each business, and the management interview is crucial. In this first of a two-part article, the author discusses when goodwill may need to be calculated and answers whether goodwill is only present if a key employee is…
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Guidance from Bross Trucking v. Commissioner (2014) Valuation analysts often have to separate company-owned entity goodwill from shareholder-owned personal goodwill in the valuation of closely held companies. These valuations may be performed for family law, shareholder dispute, breach of contract, or other litigation purposes; for transaction structuring and sale consideration allocation purposes; and for gift tax, estate tax, or income tax purposes.
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Dentist’s Employment Contract Kills Personal Goodwill Argument – Ninth Circuit Rules Peter J. Reilly on Forbes.com: Tax planners generally think that clients are well served by their thoroughness. I have little doubt that this is generally the case. Every once in a while, though, that little bit of extra work can be counterproductive. In the case of Dr. Howard the extra step, that a less thorough planner might have neglected was the employment contract between Dr. Howard, the dentist and the Howard Corporation of which he was the sole shareholder. The Howard Corporation was a C corporation and when…