We want to allocate a portion of our purchase price to personal goodwill to lower our tax rate, but the buyer is worried the systems depend on us. How do we prove our case?

Question

Tyler Smith · Accepted Answer

Allocating a portion of the purchase price to personal goodwill can significantly reduce your tax rate because personal goodwill is taxed as capital gains rather than ordinary corporate income. However, buyers often resist this because they worry the business cannot operate without the founders. To successfully make this allocation, you must prove that your personal goodwill is a distinct asset while also proving that your operations are fully institutionalized. You can demonstrate this by showing that your customers transition seamlessly to your leadership team through your established operating systems. Use your Accountability Chart to show the buyer that day-to-day operations, sales, and client delivery are handled entirely by your team, not by you personally. This proves the company is not dependent on you to survive, which mitigates the buyer's transition risk. At the same time, document your personal relationships, industry reputation, and specialized knowledge that you are transferring to the buyer. This documentation supports the tax classification of personal goodwill. By combining a clear tax strategy with a self-running operational model, you can secure the tax benefits of a personal goodwill allocation while giving the buyer total confidence in a smooth post-close transition.