Things That You Often Overlook That You Can Monetize In A Deal
We live in a world where people often have sufficient knowledge of things even if they’ve never tried them, whether it’s buying and selling the assets of a company, equity, stock, buying and selling of hard assets, or even licensing. However, there are things that people do not spare much thought for too. In this solocast episode, I’ll be focusing on one major thing people often overlook, and we’ll go through a few of them together. I’m putting this episode out there because too many people are practicing “all the elements of a deal” without structuring it like a deal and not getting all the benefits they are due.
There are things out there - for the context of this podcast, let’s say an ASSET, you could monetize. We’ll be starting with the first, which is;
Nowadays, most entrepreneurs in big cities do not manufacture things anymore. They have service-based businesses. In those cases, it’s often easier to assume you don’t have any assets, especially if you don’t see a lot on your balance sheet. Maybe you see a will-line, but that’s hard to think about because it is an intangible asset. If you are in this situation you may think, “Yes, I can sell my company, but I have nothing else to sell.” A while back, we had a solocast on licensing. We discussed how to take advantage of the value of the assets you possess, whether it’s a trademark, system copyright, trademark name, or anything. They are all potentially sellable, and you can certainly monetize them beyond licensing.
Now, let’s get to the major point of the day. This is called a Personal Goodwill sale
In this day and age, most people think they don’t have an asset to sell if they are employed by somebody, which is understandable because the client relationships are basically with the employer. When you leave, even if you can take some business with you, most people do those kinds of transitions in a way that’d get them paid by their new employer for the ability to bring business with them. They basically monetize the whole thing - they get equity for the business they bring in.
In professional services firms, you don’t get paid upfront; you may get a partnership in the company. In other situations, you may not even get any equity. People come into the business with different values, it could be some level of relationship, connection, or a local business in various fields, and they’d get hired. Yes, it helps in terms of how much someone is willing to pay you and their desire to bring you in. What it doesn’t do is allow you to monetize your asset. Let me break it down with an example;
Let’s say somebody works at a bank, and they are in an employment or contracted model. They do not own the entity or firm. The client relationships are with the firm, and they own the contracts too. So, when somebody is leaving those places and joining another business, they often come in as an employee and negotiate their experience for an equity or upfront payment, but it’s always in a loan format.
In short, you can take your business experience and turn it into an asset. I know that you’re thinking, “how’s that possible, Corey? You just said my employer owns the client relationships and all.”
That’s where personal goodwill comes in. Suppose you control a client base with millions of dollars in revenue, even though those customers are contracted with your employer. The value in the relationship you have with these customers is an asset you can sell, and that is personal goodwill.
So, what happens with the buyer? There’s some negatives for the buyer. The difference for them is; when they hire you, they get an expense deduction in the time that they pay. That is, when you get paid, they get deducted.
Also, you can structure your personal goodwill sale to get capital gains treatment. The difference in this is your buyer has to make capitalization. According to the IRS, all intangible assets are fifteen-year assets, and personal goodwill is classified as an intangible asset. That allows YOU, the seller, to get capital gains treatment on it.
As the buyer, how will this benefit your business?
We all know it’s tough to find good people these days. You can jump on this capitalization incentive and say, “Hey, we can structure a deal with someone we want to hire as a goodwill purchase, which will be tax beneficial to them. Yes, we understand it’s going to take fifteen years to pay off, but we are willing to make that investment because we want that talent, not to mention a talent that’s bringing business to us.” You can distinguish yourself as an employer by potentially structuring it that way. It’s a competitive market after all.
An Important Factor To Note Before Buying Personal Goodwill
One thing that’s important to note here is if you are buying personal goodwill (their relationship with their customers or clients), you have to own your business to justify the transaction adequately for taxes. You don’t want to purchase an asset where the seller can still use the asset for personal use after you buy it. If you set this up and the seller can still COME and GO and take that business with them when they leave, it will be tough to justify it as a personal goodwill sale. The point is these deals come with restrictions, and the employee wouldn’t be able to take it with them when they leave.
If your model is the “come and go whenever you want” technique, then a personal goodwill purchase isn’t the best for you.
Remember, none of this is legal advice.
Corey Kupfer is an expert strategist, negotiator, and dealmaker. He has more than 35 years of professional deal-making and negotiating experience. Corey is a successful entrepreneur, attorney, consultant, author, and professional speaker. He is deeply passionate about deal-driven growth. He is also the creator and host of the DealQuest Podcast.
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