Personal Goodwill vs Commercial Goodwill: Why the Difference Matters in Family Law Business Valuations

When a business is valued during a family law property settlement, its value is not always found in its equipment, bank accounts or other physical assets. Often, a significant part of its apparent value is goodwill.

But not all goodwill is the same.

A critical distinction can arise between personal goodwill, which is connected to the individual running the business, and commercial goodwill, which belongs to the business itself. Understanding the difference can have a significant impact on the value attributed to a business in a family law matter.

What Is Commercial Goodwill?

Commercial goodwill is value that can remain with a business even if its current owner leaves.

It may arise from factors such as an established business name, employees, systems, location, recurring customers, intellectual property, contracts or a reputation that belongs to the business rather than one particular individual.

A useful question is: Would a purchaser still be prepared to pay for this business if the current owner walked away?

If the answer is yes, there may be commercial goodwill capable of forming part of the business's value.

What Is Personal Goodwill?

Personal goodwill is different. It arises primarily from the skills, reputation, experience and relationships of a particular individual.

Consider a specialist consultant whose clients engage the business specifically because they want that person's expertise. If the consultant left tomorrow and clients followed them, there may be relatively little goodwill that could actually be transferred to a purchaser.

This distinction is particularly relevant for professional practices and businesses heavily dependent upon one person's expertise or reputation.

Wall & Wall and Personal Goodwill

The distinction was considered by the Full Court of the Family Court in Wall & Wall [2002] FamCA 257.

The matter involved the husband's interest in a company conducting a film production and directing business.

The Full Court found there was a significant element of personal goodwill attached to the husband that was not transferable. Importantly, the Court considered this personal goodwill to be more appropriately characterised as part of his earning capacity rather than property.

The Court found that treating this personal goodwill as commercial goodwill had resulted in a grossly inflated value being attributed to the business and the husband's company interest.

This highlights an important principle in family law valuations: a person's ability to generate income should not automatically be converted into saleable business value.

Why the Distinction Matters

Imagine two businesses each generating similar annual profits.

Business A has established employees, documented systems, recurring clients and a recognised brand. The owner could leave and the business could continue operating successfully.

Business B generates similar profits, but almost every client deals directly with the owner because of their personal expertise and reputation. Without that person, much of the income could disappear.

Although their historical profits may look similar, their transferable commercial value could be very different.

Personal goodwill may still be financially important because it can contribute to a person's future earning capacity or financial resources. However, that does not necessarily mean it should be capitalised into the value of the business as though it were an asset capable of being sold.

How Dolman Bateman Forensic Assists

Determining whether business profits reflect commercial goodwill, personal goodwill or a combination of both requires more than simply applying a valuation multiple to historical earnings.

Dolman Bateman Forensic examines how the business actually generates its income, including its dependence on the owner, employees, customer relationships, systems, brand and other factors that may continue after the owner leaves.

This analysis can help family lawyers and their clients understand what portion of a business's value is genuinely transferable and what may instead represent the personal earning capacity of the individual.

Need a Business Valuation in a Family Law Matter?

Where a business depends heavily on one spouse's skills, reputation or relationships, the distinction between personal and commercial goodwill can materially affect its valuation.

Dolman Bateman Forensic provides independent forensic accounting and business valuation services to assist family lawyers and clients in understanding the true financial position.

Speak to Dolman Bateman Forensic Today