An incredible amount of value can be derived from a single idea or a single relationship.
Relationships can be powerful in industries where owners have regular contact with customers, referral sources, suppliers and/or employees. The owners may have many good relationships and have outstanding reputations in their industries. These relationships and reputations are valuable intangibles that are referred to as professional goodwill.
When determining the value of a business, it is common for valuators to distinguish between professional goodwill, which are assets of the owners, and enterprise goodwill, which are assets of the business. It is wise to also consider professional goodwill when determining the value of the owner’s services. This may be a reason why reasonable compensation for one person should be toward the high end of the range.
For some businesses, such as professional service firms, it can be especially difficult to separate the professional goodwill from the enterprise goodwill. The relationship between the owner and the business may be so close that they almost seem to be one. But we must estimate the value of the individual’s services separate and apart from the value of the business enterprise. And there are various ways to go about this. For example, David Wood recommended using a point-scoring method to allocate between the two types of goodwill, rather than concluding that all goodwill is professional or all is enterprise (“Goodwill Attributes: Assessing Utility” by David N. Wood, CPA/ABV, CVA, The Value Examiner, January/February 2007). Of course, the exact same process may not be best for all situations. Whatever process we use to distinguish between the two types of goodwill should be well thought out and explained in clear terms.